If you can believe it, Charles Dickens wrote The Tale of Two Cities in 1859.
Seems like it was just yesterday. 🤣
Anyway, he could have easily written a version of this book in 2022, and it would have been a perfect fit.
All Mr. Dickens would have to do is change the title to The Tale of Two Online Businesses.
- It’s the best of times because we have every technological advantage.
- It’s the worst of times because most businesses still have no idea how to determine how much they should pay to get a customer.
- It’s the age of wisdom because there is so much help available.
- It’s the age of foolishness because thousands of businesses still don’t know their numbers.
Numbers like CAC: Customer Acquisition Cost.
A basic formula looks like this…
Keep in mind that’s the most basic formula.
But it’s important because the purpose of business is to turn a profit.
Which begs the question, “How much profit should I generate for my business?”
We’ll get to that in just a moment, but first…
… let’s dive in a little deeper.
If you have a $4 million business and 2,000 customers, then the CAC = $2,000 over an entire year.
In this scenario, the cost to acquire a customer varies by two factors.
- All the costs associated with your business, such as cost of goods sold (your COGS), refunds (how many refunds you get), overhead, and…
- How much cash you have on hand.
So, in this case, let’s say we want a 20% profit margin.
- Value = $2,000
- Refunds = $1,800 = 10% = $200
- COGS = $1,400 = 20% = $400
- Overhead = $800 = 30% = $600
- Profit = $400 = 20% = $400 (Customer Acquisition Cost)
Notice that #5 is profit at 20%, which gives you a CAC of $400.
But if you are only willing to spend $200, you limit your business’s ability to scale.
Interestingly enough, the lower CAC may increase your profitability.
There’s a balancing act between the two.
How much do you want to scale vs. how much profit do you want?
Ultimately, you must decide which will win.
Coming full circle to the question,
“How much profit should I generate for my business?”
If you offer digital products, you should shoot for a profit margin between 20%-40%.
This range is achievable in most digital products because the cost to produce them is pretty low.
For those reasons, digital products make it much easier to be profitable…
… assuming you know your numbers.
If you are in the eCommerce space, it’s somewhat different.
In the eCommerce space, we typically see profit margins between 5%-15%…
… with an average of 10%.
If you are in the services business, we typically see about a 30% average.
So, when trying to figure out what you can pay for a customer (CAC), consider what the average is in your industry.
Then try to beat it.
Naturally, your profitability will depend on your individual circumstances.
To help you get off on the right foot, here’s a basic CAC calculator you can use to find your Customer Acquisition Cost.
There’s no cost to downloading it, and you don’t even need to opt in.
Finally, if you need expert help, you can find it here.