Net Sales is the first thing you get to see on an income statement. So, you need to double-check that you are providing the right figures.

But don’t get scared. Calculating the Net Sales is quite simple.

This article explains Net Sales and helps you understand how the formula came to be and how you can use it in your business.

What is net sales?

Net Sales is the amount that you are left with once you remove all the deductibles from your gross sales. The deductibles include returns, discounts, and allowances. It is the amount of revenue that a company puts on its income report statement. It is the primary sales figure that analysts review when you release your income statement.

“Net sales” defines how your business is performing. While the formula for net sales is quite simple, computing the individual components can be quite difficult.

Net sales formula

The Net Sales of a company are simply given as:

Net Sales Formula

The formula is a simple formula involving subtracting a few elements from the gross sales. Here’s what those individual elements mean.

  • Gross Sales: This is the amount from the total sales. The amount is not adjusted for any discount, returns, or allowances. Gross sales include all types of sales including credit card sales or even cash sales.
  • Returns: You will always have cases when sold goods are being returned. This can happen because of manufacturing issues, or the product is not what the customer expected it to be. Since the customer is generally refunded a full or a partial value of the original purchase price, the amount is subtracted from the gross sales.
  • Allowances: Goods can get damaged but can still be functional. Companies often sell these at a reduced cost. The difference between the actual price and the selling price is the allowance.
  • Discount: All brands provide discounts now and then. These include seasonal discounts, loyalty discounts, discounts for bulk purchases, and more. 

Let’s understand the concept of net sales with an example.

Let’s say, a company makes a gross sale of $1,000,000. Because of issues with the goods or the sales process, it must return $10,000 to customers. It also gives sales allowances of $5,000. During sales processes, the company gives $15,000 as a discount. Then this is how the net sales figure is calculated:

Net sales = $1,000,000 – $10,000 – $5,000 – $15,000 = $970,000

You can also use the following online net sales calculator to quickly check your sales numbers.

Online net sales calculator


Enter Gross Sales for a given period ($):
Enter the amount of goods returned ($):
Enter sales allowances you paid ($):
Enter the total discount you gave ($):

Your Net Sales is: $

Types of transactions affecting net sales

Several sales transactions affect net sales.

However, such transactions mostly happen for business that sells physical items. Some of these transactions are unlikely to happen in the case of a service or SaaS Sales. These transactions as grouped into three categories as mentioned before: allowances, discounts, and returns. Here is what they mean.

Sales Allowances

When selling physical goods, often the customer will receive items in slightly damaged condition. While these can be repaired easily, the brand still will have to bear some cost. It may also happen that the damage is simply cosmetic, and the product works just fine. In such cases, the customer may ask for a reduced price.

Let’s take an example. Your company may sell refurbished vehicles, and the customer received the vehicle with a minor issue with the tail lamp. The customer can themselves fix the light and pay for the repairs themselves. However, they can ask for a reduced price on the purchase to accommodate the repairs.

The reduction in the cost is your sales allowance. If you plan to reduce the price of the car by $100, then that is the sales allowance you are providing. Sales allowances are uncommon since they act as partial refunds.

Returns

Returns are when the goods are returned by the customers for either being defective or not being useful. A product can be defective because of a manufacturing issue or because of shipping damage.

A product may be not useful when it is not correctly marketed to the right audience. For instance, a customer may have had different expectations from the product. Even though it was completely functional, the customer could not use it. In such cases, the full amount is refunded back to the customer.

Often, processing refunds costs extra money. If you are processing too many returns, you need to look into your manufacturing process or your marketing strategy.

For your reference, here’s the return rate by retail category, as disclosed by Shopify.

Statistics - Ecommerce Return Rate by Retail Category

If you’re in the fintech sector, you can refer to the following sales return rates by type of payment.

Statistics - Return Rates by Type of Payment Made

Sales Discounts

Discounts are offered during the billing of the product. A company can afford to offer a discount if they are sure that they are making the necessary profit. Brands can offer seasonal discounts or customer-specific discounts. Discounts make the products more accessible and increase the number of sales.

There are no rules or benchmarks around discounting. Brands generally offer one or more of the following types of discounts.

  • Bundled discounts.
  • Prepayment discount.
  • Volume discount.
  • Event/seasonal discounts.
  • Free shipping.
  • Buy one, get one free.

However, it completely depends on a company’s profit margins or investments planned for customer acquisition.

Net Revenue vs. Gross Margin vs. Net Income

Net Revenue is the same as net sales – it is the final revenue made by the company as explained earlier in the article.

Gross Margin usually factors in the manufacturing costs. These include the Cost of Goods Sold or COGS. To find the gross margin, you simply deduct the cost of goods sold from the net revenue or net sales. These costs include the sales overhead costs, the labor costs, manufacturing costs, and so on.

Gross Margin is a useful sales metric when you want to look at how much you are losing while manufacturing or sourcing your product.

Net income is the bottom line of the company. It is the amount of money that the company gets to keep after subtracting all the expenses needed to keep the company running. These expenses include:

  • Operating expenses
  • Payroll and Taxes
  • Depreciation of fixed assets
  • Interest on loans

Taking the previous example, the net sales of the company is $970,000. Now, if the total amount spent on employee wages and operating taxes is $350,000, then the net income of the company is $620,000.

Here is a formula for net income.

Net Income Formula

Points to Remember

  1. Net sales are the gross sales made, minus the allowances, discounts, and returns. Gross margin considers the costs of goods sold while net income is the bottom line that factors in operating costs.
  2. When net sales are externally reported, they are mentioned in the “direct costs” portion of the statement.
  3. The net sales affect the gross profit and the gross profit margin.

How to use net sales in your business strategy correctly

The management uses multiple metrics to better understand if they should continue selling a product, introduce a price change, or more. Net Sales and Gross Margin are both useful internally.

Net Sales or Net Revenue gives you a complete picture of how much money you are taking in. This allows you to adjust discounts or provide more competitive pricing. The Gross Margin gives you an idea of how much your product manufacturing or sourcing is setting you back.

The net income is the metric that most external parties are interested in. It is generally the bottom line or the last line of an income statement. The difference between net income and net revenue can show if you are losing out more than necessary.

Are you providing too many discounts? Then you can make changes to the pricing or provide more practical discounts.

Are you processing too many refunds? This could indicate an issue with your manufacturing process. If you look at the reason behind the refunds, maybe you will see that you are not marketing to the right customer. This means you need to shift your sales and marketing strategy. Moreover, customer reviews and feedback can provide valuable insight into what you are doing wrong.

Ultimately, you need to look at all the revenue figures to paint of complete picture of your business. All the metrics, when taken together will provide you with a lot more room for improvement.

FAQs

Do net sales mean profit?

Net sales is not the same as profit as it does not include the operating costs of the company. However, net income can be equated to profit. Net income mentions the leftover revenue after all the expenses are paid off.

Do net sales include tax?

Net sales do not include the taxes to be paid by the company. The taxes are included in net income.

What is the difference between net income and net sales?

Net income is the profit the company makes after having paid off all the expenses such as employee wages, loans, and operating costs. Net sales are the amount after the deductibles only related to the sales. These include allowances, discounts, and referrals.

What is the difference between gross and net?

Gross refers to the “total” or “whole” while net refers to “what remains”. For example, gross profit, sometimes referred to as gross income, is the profit the company makes from the sales of its goods and services. The net profit is the profit that remains after all the expenses are subtracted from the revenue.

How do you predict your brand’s ability to grow?

The quick answer is—by tracking your Return on Sales or ROS.

We all want to have our sales numbers as high as possible. But does everyone achieve it?

Surprisingly, only 24.3% of salespeople surpassed their quota in 2021, as per Sales Insights Lab. What does it mean? And what does it have to do with ROS? 

  • First, it means that most companies are not able to effectively increase their ROS. 
  • Second, the sales reps who did manage to exceed their quota are significantly small in number. 

This brings us to the natural conclusion: increasing return on sales is not easy. 

So, what’s the solution?

Well, according to high-performing reps, the secret to higher ROS lies in the customer-centric service.

LinkedIn’s State of Sales 2021 report found:

  • Top performers-those who met their quota by 125% or more-are likely to put their customers first. 72% of the top performers chose the ” always ” option when asked if they put the buyer first.

It makes complete sense, but are these results visible to customers?

The short answer is- no.

Barely 23% of buyers believe that sellers put them first. As a result, ROS is generally lower than most of us would like it to be. 

Top performers do make a difference. But the answer to increasing ROS is far more complex. Before we explore how you can increase your return on sales, let’s define it first. 

In this article:

What is Return on Sales?
ROS formula
Online Return on Sales Calculator
Examples
The difference between Return on Sales and Profit Margin
3 Practical ways to increase your ROS

What is Return on Sales?

ROS or Return on Sales is an important sales KPI that displays how much profit you earn per dollar of sales. It is used to assess a company’s operational effectiveness.

For example, imagine your company made $60,000 in revenue and spent $30,000 this year. 

To calculate your ROS, you must first find the profit you made. To do this, subtract your sales from your expenses, i.e., $60,000-$30,000. This results in a profit of $30,000. Next, divide this figure by the total sales or revenue, which is $60,000. 

This gives us a value of 0.5. To calculate your ROS percentage, multiply this value by 100. Overall, the ROS percentage will be 50%.

For each dollar in sales, that percentage reflects how much profit you make in cents. Your ROS would be 50 cents per dollar in this case.

Return on Sales Formula

Calculating ROS is fairly simple. You can use the following formula to calculate the return on sales.

Return on Sales formula

Where, Profit = Revenue – Expenses

Note, you can calculate the ROS on a monthly, quarterly, or yearly basis. Just ensure that you’re entering the Profit and Revenue numbers for the same period of time.

A rising ROS shows that a business is growing. A declining ROS, on the other hand, could indicate approaching difficulties.

We use ROS to compare current and future period estimates to past period calculations. This enables a business to study trends. It also indicates your company’s operational efficiency.

Comparing one company’s ROS percentage to that of a competitor is highly valuable. One of the most telling indicators of a company’s overall profitability is its return on sales. The return on sales ratio is vital to creditors and investors. 

It gives a clear image of a company’s ability to repay loans, reinvestment possibilities, and dividend prospects.

We’ve built a simple ROS calculator that you can use to quickly understand your sales numbers.

Online Return on Sales Calculator


Enter your profits in a particular time period ($):
Enter your sales revenue in the same time period ($):

Your Return on Sales for the given time period is: %

The return on sales ratio is one of the most reliable measures used by businesses to assess their annual performance. But some businesses consistently rely on the ROS ratio. Let’s look at them.

Return on Sales Examples

1) The Automotive sector

In 2021, the automotive manufacturing sector’s size was at 2.7 trillion dollars. In 2022, the size is forecast to reach a value of 2.8 trillion dollars. 

Investors are constantly looking for ways to judge whether a manufacturer is worth their money. This makes the return on sales ratio an ideal way to forecast manufacturer growth. 

The return on sales from automotive dealers in 2021 was 7.2%. The return on equity, a measure of return on investment, was 29.1%. Investors can confidently invest their assets only after they know these figures. Measuring and analyzing these ratios are vital to gaining trust from investors. 

2) The print and publishing sector

There’s a constant refrain among the internet-age Gen Z and the millennial crowd about how the print is dying. But the industry’s return on sales figures points to the opposite. 

The print and publishing sector had a return on sales percentage of 7.5 in 2021. Alongside this, the return on equity was at 5.5%. The 2022 return on equity shows a rising number which currently sits at 12.2%

It could be because the print sector is better adapting to the online format. In contrast, it could also mean we’re witnessing a resurgence in the consumption of print media. If you’re in the print and publishing sector, it’s a good time to get investors on board. 

3) Air transport

The air transport industry took a major hit in 2020 due to the Covid 19 pandemic. This led to the return on sales figures falling to an all-time low of – 41.7%. By 2021 these figures had a significant increase, bouncing back to a solid 2.5%. 

Return on sales depends on multiple factors, and this example displays exactly that. If your sector is experiencing an overall decline in sales, increasing your ROS is a real challenge. 

Your profit margin can drop significantly depending on various circumstances. This is why it is crucial to monitor and keep track of your return on sales.  

But wait, what is the difference between the return on sales and your profit margin? Let’s figure out how return on sales differs from your profit margin.

Return on Sales versus Profit Margin

Some points to note while measuring your return on sales are:

  • It is a direct measure of your business’s operational efficiency. 
  • It does not include any interest or taxes when we calculate it. 

In contrast with the profit margin, we calculate ROS by:

  • Taking into account both taxes and interest when we calculate it. 
  • It is a direct measure of how much profit your business gains in a quarter/year. 

Although many people use these terms synonymously, they are very different. An example of measuring your profit margin would be:

  • Let’s say, you earn $10,000 by selling products worth $5000. Your profit comes up to $5000, this is after you take into account your taxes and interest. 
  • Next, divide this figure by your total revenue to get 0.5. 
  • After this, you multiply the value by 100 to get a profit margin of 50%. 
  • Both formulas remain the same, the only difference lies in the numerator. As profit margin measurements require you to calculate with taxes and interest in mind. 

With that, we come to the final section of this article, how do you increase your return on sales? 

3 Practical ways to increase your return on sales

1) Invest in the right tech

Investing in a solution that works in your favor can be a game-changer. LinkedIn’s 2021 State of Sales report found that technology is at the core of fostering trust. Sales technology, in particular, is a critical component in establishing trust. Let’s look at some figures that explain this in more depth:

  • 77% of sellers claim they want to increase their spending on sales intelligence tools
  • Furthermore, 54% of sellers claim sales tools help them develop stronger connections with customers.
  • Another 54% of salespeople said that using sales tools helps them win more deals

The clear step to improving your ROS is to make selling easier. Investing in any tool can seem expensive at first. But these tools offer a highly beneficial return on investment. 

These are the best tools to invest in if you’re wondering what you should buy:

  1. A CRM system
  2. A sales engagement tool
  3. Sales intelligence software

CRM solution brings the most benefits to sales reps on this list. If you’re a sales-led organization, investing in sales CRM makes more sense. It will help organize leads and manage sales processes effectively. One such great sales CRM is LeadSquared

Sales intelligence or engagement software tends to be more niche and specific. For instance, if your reps are struggling with only prospecting, then something like LeadFeeder or LinkedIn’s Sales Navigator would be a better option.

Overall, improving your ROS takes time and effort, with the right investment though you’ll see improvements sooner than later. 

2) Keep customers at the core of your business

Creating positive customer experiences will automatically push your ROS to greater heights. The best way to go about this is by focusing on retention. For instance, statistics show:

  • One negative experience led to nearly 43% of consumers blacklisting a brand. 
  • After just one unpleasant encounter, more than 34% of customers claim they would never buy from a brand again. 
  • More than 88% of customers complain about their unpleasant experiences.  
  • Around 59% of people will inform their friends and family of their negative experience. 
  • Only 35% of people will call a brand to allow them to fix the problem.
Statistics - impact of negative experiences on customers

Investing in creating meaningful customer relationships is essential in current times. Customer loyalty can be hard to attain and sustain over time. Creating positive customer experiences from the get-go is necessary to increase your ROS. 

Providing sales reps with intensive and informative training is the first step. But the second and more vital step is to maintain a high level of accountability and transparency. 

Your return on sales may not shoot up immediately. But I can guarantee a good level of stability on your ROS figures in the long run.

3) Competitive pricing for a complete package

The final and most obvious method to increase your ROS is to increase product cost. However, research beforehand to make sure you’re not pricing yourself out of the market.

You do not have to be pricing the same as your competition all of the time. Make sure you advertise any advantages you have, such as a warranty or excellent customer service. 

It provides adequate justification for your buyers to pay the higher price for your product. Even a ten-cent increase in the price of an item that you sell 10,000 copies monthly will raise your profit by $1,000. 

It might seem daunting to carry out at first. But the increase will be gradual, and your product value will justify it. You can also strive to lower your inventory costs. 

Check with your vendors to see if you can get any discounts. If discounts aren’t available, try to lower the price of inventory. Consult other suppliers to determine whether switching suppliers may result in a discount. Even the tiniest reductions add up to significant profit gains.

With that, we come to the end of this section. Let’s get right into some points to remember and FAQs. 

Key Takeaways

Return on sales is a useful metric that you can use in a variety of situations. It’s critical to have a picture of your brand as a business owner. You should know what ROS is and how to measure it if you wish to know how effectively you’re turning over revenue. The key points to note from this post are:

  • ROS is highly dependent on the industry within which you operate. Your ROS can decrease or increase as a result of changing supply and demand. 
  • Aiming to increase your ROS is a great idea. But the step before that is to ensure you can maintain your existing ROS. Focus on retaining customers first, then move on to acquisition. 
  • Measuring your return on sales can help you keep track of your company’s efficiency. But it is not the only metric you need to measure. Metrics like customer lifetime value are equally important to company growth. 

FAQs

What is a good return on sales? 

An ROS between 5-10% is what most reports claim to be a good return on sale. But the better idea would be to check your industry-specific ROS benchmarks. For instance, the publishing industry’s ROS in 2021 was 7.5%. In contrast, during the same year, the water transport sector had an ROS of -11%. In general, a positive integer on your return on sales ratio is a favorable sign. 

What does ROS mean in business? 

Return on Sales is a financial metric that measures how well a firm can create operating profit from its revenue. We typically use it to evaluate the performance of an organization. We do this by determining what percentage of revenue ultimately results in profit for the firm. It indicates whether or not the company’s operations are progressing to their full potential.

Is sales return an expense? 

We generally do not consider any sales returns as an expense. But, sales returns do reduce our income or earnings significantly. As most of us are aware, an expense indicates spending some amount of money. Sales returns on the other hand are a loss of earnings. It counts as a loss in your revenue but is not an expense. 

Does a low return on sales indicate a weak company? 

A low return on sales does not indicate a weak business. Return on sales is merely one aspect of a company’s overall performance. Moreover, companies should use ROS only within their industry benchmarks.  A declining return on sales is a cause for concern. But there are always ways to increase your ROS. Explore the reasons for your low ROS and figure out how to overcome them. 

What’s the difference between ROS and operating margin? 

There is a distinction between the two, despite the fact that they are frequently used interchangeably. The numerators are the difference between ROS and operating margin. We calculate return on sales using profits before interest and taxes (EBIT). EBIT vs. operational income is the most significant distinction between these two ratios. EBIT is a non-GAAP- Generally Accepted Accounting Principles measure that we use for ROS. Operating income, which is a GAAP statistic, is what we use to calculate the operating margin.

When people plan their monthly or even daily budgets, a cup of coffee never seems to make the list of their top spends.  
 
But an average American spends $32,000, over their lifetime, on their daily cup of brew from Starbucks.  
 
To put things into perspective, the daily purchase in the range of $2-$4 over time becomes equivalent to the cost of: 

  • A modest SUV  
  • A vacation abroad 
  • The seed money for your small business 

Instead, the entire amount goes to Starbucks.  

This was the tiniest lesson on Customer Lifetime Value (CLV). Let’s understand what CLV is in-depth.

What is Customer Lifetime Value?

The Customer Lifetime Value is the total revenue each customer brings over the period of their association with your business. For example, in the case of Starbucks, the average CLV is $32,000, which is calculated by multiplying the average order value ($3.5) with the number of orders placed (approximately $9.1k) by a customer.  

The exact approximation doesn’t apply across all businesses. The emphasis on increasing the Customer Lifetime Value also depends on the type of industry.

The importance of CLV for product vs. service businesses 

To increase profitability, all businesses can benefit from expanding their CLV. But, for some businesses, tracking CLV is more important than others.  

Let’s discuss this for product and service-based businesses.  

1. CLV for Product-based Businesses  

Product-based businesses can have one-time purchases, such as buying a house or an expensive car, or recurrent purchases, like buying multiple courses from an Edtech business.   

These types of businesses benefit from CLV but only to a limited extent. For one-time purchases, like a car, there is a possibility that the client will appreciate the service extended and buy another vehicle or additional accessories, but it pretty much ends there.   

While for an Edtech business, the opportunity to cross-sell courses or upsell programs extends across different subjects and academic years. For example, a student in 11th grade who has opted for Physics and Chemistry courses can also purchase the mathematics course or coaching for competitive exams. The only limit on the student’s lifetime value is when they graduate from high school and enroll in a university.   

The CLV for such businesses depends more on customer referrals and satisfaction. Some of the sales metrics that product-based businesses can track are:  

  • Net Promoter Score (NPS) to gauge customer satisfaction 
  • Overall Customer Satisfaction (CSAT) 
  • Number of referrals  
  • Average order values

2. CLV for Service-based Businesses

Using CLV, service-based businesses can structure their targets, marketing spends, and gross margins. Service-based businesses such as OTT platforms (Netflix and Amazon Prime) and SaaS businesses operate on a renewal model. Unlike product-based companies, the payment isn’t a one-time investment for their customers.  

These service-based sector needs to ensure that the customer doesn’t switch over to their competitor. And if a customer does churn, the revenue they generate is higher than the sum of the acquisition cost and the service cost.  

Since CLV is an important parameter for this industry, its calculation is a little complicated and depends on various factors. We’ll get to that a bit later in this article.  

Essentially, all kinds of businesses benefit as the CLV increases. The most significant factor that affects CLV is customer satisfaction. Satisfied customers are an asset to your business because they have no reason to seek an alternative.  

But, increasing your CLV isn’t a Herculean task!  

Because retaining a client is a relatively passive activity, you don’t need to convince them to choose your business or implement any services. Retaining a customer cost up to five times less than acquiring a new customer. 

Why do you need to calculate CLV? 

Along with improving customer retention, calculating and tracking CLV has many more benefits! A high CLV helps you achieve the following:

Improved Profitability  

Acquiring new customers is expensive. From the marketing spends that go into lead generation to the product being adopted by your user, you’ve covered a long journey before a prospect becomes a customer.  

But if this customer opts out after the first year of usage of your services or makes no recurring purchases, the customer acquisition cost can exceed CLV. In contrast, if the customer keeps renewing or making new purchases, your CLV and hence profitability shoots up. As a rule of thumb, your CLV should be at least three times your CAC.  

Increasing the customer lifetime, or the number of years that they are associated with your business directly translates to higher revenue. Focusing on customer success and measuring average CLV across segments help companies extend customer lifetime.  

Decrease Churn  

Churn’s what all businesses are running away from; it makes your sales and marketing efforts go in vain. The opposite of churn is a good CLV that signifies a high customer success rate.  

By focusing on increasing CLV, you are essentially targeting the touchpoints where most customers drop off. If the customer’s predicted CLV is low, it indicates that the account will churn soon, so your teams can try to troubleshoot the problem areas for the account.  

Streamline your Business Goals  

Every business wants customers who keep adding revenue to your business. Identifying similarities between high-CLV customers can help you segment your users based on purchasing patterns, regions, industries, or other parameters relevant to your business.  

Calculating CLV can help you shift your focus towards new opportunities with a historically high CLV. A directed approach leads you towards valuable customers with improved product-market fitment and faster conversions.  

Strategize Marketing Campaigns  

CLV impacts two teams, customer support, and marketing. For customers with a lower predicted CLV, customer experience management decreases the possibility of churn. And for customers with a longer customer lifetime, the marketing team can swoop in to increase upsell and cross-sell opportunities.  
 
The marketing team can restructure their budgets towards high-return activities with the correct data on high-value customers and profitable segments. The CLV itself is a metric that can be used to evaluate long-term financial returns from marketing investments.  

The first step toward achieving these benefits is knowing how to calculate CLV. 

How to calculate CLV? 

There are a couple of ways in which a business can calculate CLV. You can choose one of these based on the most reliable and trackable metrics. As the complexity of your business increases, you might have to factor in variable metrics for the CLV calculation.  

Simple CLV Calculation  

This formula considers Customer Lifetime Value as a function of the monetary input and output related to the customer. The discount rate and gross margins are not considered for this calculation. If you’ve just started tracking your CLV, you can consider using this formula to calculate it individually for each customer.  

Simple CLV Calculation formula: 

Simple CLV formula

This calculator will help you find the Simple Customer Lifetime Value for your business:


Cost per Product/Service($):
Cost of Customer Acquisition($):
Cost to Serve($):

Your Simple Customer Lifetime Value is: $

Check out our article on Customer Acquisition Cost for average customer acquisition costs across different channels and industries. 

Historic CLV Calculation  

Calculating CLV historically is possible only if you have the data of all the transactions that each customer makes. The transactions can be individual purchases, monthly/yearly renewals of the service, and revenues from upsells and cross-sells.  

Historic CLV Calculation formula: 

Historic CLV formula

Where Average Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue x 100  

Predictive CLV Calculation  

Many businesses opt to calculate the predictive CLV instead of the historical model. Predictive models utilize the previous trends and data to estimate the CLV for new customers. This model helps you strategize your business plans and set targets for sales teams.  

Businesses are also developing smarter ways to analyze data using machine learning and predictive models. Based on the kind of approach, you can predict CLV in the following ways:  
 
1. Historical Approach: 

  • Aggregate Model: This model considers previous transactions to predict a value for CLV. 
  • Cohort Model: Customers need to be segregated into segments/cohorts based on similar characteristics—industry type, transaction date, etc. The CLV is calculated for each cohort individually.  

2. Predictive Approach 

  • Machine Learning (ML) Model: A regression analysis is conducted on past transactions and customer data to predict the CLV. It is a highly dynamic model, and with the right framework, the CLV can be updated in real-time.  
  • Probabilistic Model: A probability distribution is applied to the customer data to estimate value from the transactions in the future. The CLV is calculated on the predicted transaction values. 

These models are highly accurate but developing complicated frameworks for transactional data is not feasible for many businesses.  

But if you’ve recorded and tracked the right data using a CRM or a lead management tool, you can use this simpler formula to predict the overall CLV:  

Predictive CLV Calculation formula: 

Predictive CLV formula

You need to use the recorded sales data for these metrics. Here’s how you calculate them:  

  1. Average Order Value (AOV) = Total Revenue / Number of Orders
  2. Purchase Frequency = Total Number of Orders / Total number of Customers   
  3. Average Customer Lifespan = Sum of Customer Lifespan (in years)/ Total Number of Customers  

Note: The Predictive Customer Lifetime Value is calculated over a specific time period.  

Don’t fret if you’re not a math genius, and you don’t have to be one to calculate your CLV in under 2 minutes. Just use our CLV calculator:  


Enter Average Order Value ($):
Enter Purchase Frequency:
Average Customer Lifespan (years):

Your Predictive Customer Lifetime Value is: $

Traditional CLV Calculation  

The traditional calculation is best suited for businesses that don’t have a flat revenue model. Businesses where the pricing changes over time (for example, SaaS) or the cost of renewal rates varies over time (for example, Insurance) can utilize this formula to calculate CLV. It also accounts for inflation.  

Traditional CLV Calculation formula: 

Traditional CLV formula

 

Where,  

  1. Gross Margin = Total Sales Revenue – Cost of Goods Sold / Total Sales Revenue 
  2. Retention Rate = Number of users that stayed over the time period / Total number of users  
  3. The discount rate accounts for inflation and for convenience, the value can be taken as 10%.  

After choosing the CLV calculation that works the best for you, the next couple of steps are to track it effectively and work towards improving it. These six tips can help you improve your CLV! 

How to improve CLV? 

1. Maintain customer relationships  

The key to sales is building a good relationship with your client. And the same extends to customer retention, especially for service-based businesses. Creating a meaningful customer relationship begins with listening to your customer.  

Create touchpoints to collect your customer’s feedback and use it to improve your product or service. The customer should also have a few channels where they can reach out to your business. Your customers should have 24×7 accessibility, to at least one channel, either by call or chat.  

You can implement LeadSquared, a Customer Relationship Management tool to manage leads and feedback. It ensures that each customer activity and feedback is tracked for a quick resolution with a shorter TAT. 

2. Manage expectations  

To gain your customer’s trust, you must deliver what you promise. If your product/service underdelivers or lets the customer down, it’ll lead to churn. And your product is probably not at fault here.  

As a business, customer segmentation can help you find the right product fitment for customers from different industries or varying attributes. You can also understand their interests and buying intent based on their engagement with your marketing initiatives. Essentially, figure out what they need and provide the right solution to increase the customer lifetime.  

3. Identify cross-sell and upsell opportunities 

Upselling and cross-selling boost your business’ profitability. But not every customer fits the bill for this segment.  

Maintain a close relationship with your customers to understand their current product usage and identify opportunities to cross-sell and upsell. Frequent audits of how the customer uses your service or the purchase frequency of your product can help you discover new opportunities.  

Whether it’s a new update, feature, or accessory, the customer should believe that it’s an essential complementary addition to their current purchase. Based on previous activities, service-related businesses can use marketing automation to educate and nurture their customers. In contrast, product-related businesses can gather more insights into the user’s persona and use it to upsell. For example, suggesting a laptop with higher RAM to a software engineer.  

4. Increase the average order value 

“Would you like to make it a meal?” This is something that everyone’s heard at fast-food chains. It’s how they increase your order value from one burger for $1.99 to a meal worth $3.99. The same idea can apply to many businesses. For example, 

  • Offering pre-paid servicing to new car owners. 
  • E-commerce sites cross-selling products with their “customers also bought section.” 

Understanding your client’s long-term goals help you recommend relevant services and products. SAAS businesses can also create service packs to become an end-to-end solution for businesses. Clubbing services or making products sound like add-ons ease the customer into deciding to buy.  

5. Introduce new discounts and rewards  

Loyal customers deserve all your appreciation, along with a few additional perks! Businesses need to keep their customers happy and excited about their service. And everyone loves a good deal.  

You can introduce discounts on renewals; even seasonal discounts on products go a long way. But CLV highly depends on the cost of customer acquisition (CAC). Starting a referral program helps you decrease CAC while rewarding your customers.  

Word of mouth influences around 20-50% of purchasing decisions, especially when a customer is trying out your product/service for the first time. The value that a referred customer generates is also 16% higher than a non-referred customer.  

Membership programs work out pretty well for product-based businesses. Here, a membership card guarantees discounts on future purchases, which is a great incentive for customers to stick to your business.  

In this article, we’ve covered everything related to CLV, but the ability to track your customer’s journey is the first and most crucial step towards improving it. Different stages in your post-sales process—product implementation and adoption, collecting customer feedback, and tracking usage—affect CLV. You need complete visibility into these and your customer’s activity for a higher CLV. 

LeadSquared can help you track customer activity and record essential metrics to calculate Customer Lifetime Value. And if you’re looking to improve it, you’re just a demo away. Get in touch with our team today!

FAQs

Why is CLV important for my business?

Customer Lifetime Value is a direct indicator of your business’ profitability. A high CLV is proof that you’ve achieved the correct product-market fitment and brand loyalty with your customers. It leads to higher customer retention and turnover for your business.  

How can I calculate CLV?

There are a few approaches that you can use to calculate CLV—Simple, Historical, Predictive, and Traditional. An easy formula to calculate the overall CLV for your business is: 
Customer Lifetime Value = Average Order Value X Purchase Frequency X Average Customer Lifespan 

How much should my CLV be?

A business should aim for its CLV to be at least three times the cost of customer acquisition. It ensures that your marketing budgets are in check and your customer retention continues to be high. For example, if your CAC is $50, a healthy CLV would be $150 or higher.  

Engaged patients are better able to make informed decisions about their care options.

WHO

Healthcare is about helping people.

But sometimes people feel that the care isn’t accessible, while at other times, they think it is not convenient or affordable. 

The result—they prefer not to take medical help. 

Sadly, this trend continues.

For instance, The Epic Health Research Network (EHRN) data shows hospital admissions below expected levels in early 2021.

Hospital admissions statistics - United States

Similarly, OPD visits were lower than expected (even though the outpatient care rebounded by December 2020).

United States - Change in OPD visits statistics 2020

One of the reasons for the lesser number of people seeking healthcare services is the economic downturn because of the pandemic. Other reasons include dissatisfaction of some sort with the provider.

But the implications of missed care can be severe. It may lead to worsened outcomes or even premature death.

Amidst this, how can healthcare providers ensure care for those in need?

The answer is: through patient engagement.

What is patient engagement?

Patient engagement is a healthcare strategy where providers and patients work together to improve health outcomes. It involves educating patients about their conditions and encouraging them to participate in making decisions about their care.

Patients who actively communicate with their providers experience better health outcomes and incur lower costs.

According to a survey by healthaffairs.org, patients who were in contact with trained health coaches through telephone, email, reported the following benefits compared to patients receiving a usual level of support.

  • 5.3% lower overall medical costs
  • 9.9% fewer preference-sensitive surgeries

Thus, patient engagement is beneficial for both—patients and providers.

With this, providers can ensure timely treatment, and patients can enjoy better health. 

But only if it was that easy.

Providers realize that their organization’s patient engagement activities and resources were insufficient

Patient satisfaction scores also tell a similar story. 68% of patients aren’t satisfied with their interactions with providers.

So, what can be the best way to improve patient engagement?

We’ll discuss this shortly. 

Before, a quick look at the challenges that prevent healthcare institutions from personally engaging with every patient.

Patient engagement challenges

Often, time and resources are the main constraints in engaging with patients.

In a NEJM Catalyst Insights Council survey, 63% of healthcare executives stated “time investment” as the biggest challenge in designing patient engagement into care delivery.

Statistics - patient engagement challenges

From a patient’s perspective, the hesitation in engaging with providers could be due to health literacy, busy lifestyle, or prior negative experience.

Good experience is crucial to encourage patients to engage with the provider. 

However, that’s usually not the case.

Nearly 67% of patients report a negative experience with the provider. It includes inefficient visits, unhelpful medical advice, etc.

People who have a negative experience with the services they availed have either switched providers or are less likely to seek medical care the next time they need it.

But this doesn’t resolve their healthcare needs.

Healthcare institutions can take a step forward to engage with patients and help them improve their condition.

The next section equips you with ideas to plan your patient engagement strategy.

How to design your patient engagement program

Effective patient engagement programs can encourage people to focus on their health and seek timely help.

Following are the four crucial elements of a patient engagement strategy.

  1. Personalization
  2. Regular Follow-ups
  3. Patient Education
  4. Feedback

Let’s talk about these in detail.

1. Personalization

Personalization is an important aspect of patient engagement because patients need specialized care from their providers depending on their condition, the intensity of ailment, and their stage of recovery.

However, personalized care demands time and resources. And providers, when they have to handle several patients, often fall short of both. The good news is technology can help you deliver personalized care at scale.

Here are some examples of healthcare firms providing personalized communication to their patients.

Orlando Health uses data to communicate with their patients (new mothers). They can choose a track to focus on, such as caring for a new baby or family. They receive regular, personalized emails (based on the condition they registered at the hospital) to address questions they may have.

Talkspace, a New York-based online and mobile therapy company connects patients with therapists. Patients take an assessment and are matched with one of the licensed therapists in Talkspace’s network. They track and record the patient’s clinical progress, which is accessible to the patient as well.

Talkspace - client progress tracker

2. Regular Follow-ups

Follow-ups can help you build a good working relationship with patients.

You can follow-up with patients to:

  • Schedule appointments
  • Remind them about the scheduled appointment
  • Share lab results
  • Monitor health
  • Confirm medicine regimens
  • Reinforce knowledge and action plan

When it comes to personalized communication and follow-ups, healthcare CRM could be of great help. It allows you to send automated appointment reminders via text, email, or call.

3. Patient Education

Even though people are more informed today, nearly 36% of adults in the US have low health literacy. Lower health literacy causes medical errors, increased illness and disability, and loss of wages. 

While there can be several reasons for lower health literacy, the major ones are:

  • Complex healthcare system
  • Reading ability, age, emotions of the patients
  • Physician’s attitude and communication skills
  • More self-care and self-education expected from patients

Nonetheless, patients expect emotional support from the care provider. They want their physicians to hear them out, show empathy, and explain their condition to them.

Statistics - patient experience

With a structured patient engagement strategy, you can bridge this gap with timely and compassionate communication with patients. Here’s how.

  • When a patient inquires for an appointment, ask them about their symptoms, and suggest an appropriate physician.
  • Sometimes patients don’t ask the right questions and are left dissatisfied with the interaction. One way to address this challenge is to send a list of common questions that a patient can ask their physicians. You can either give them a leaflet during their appointment or send them the questionnaire with the appointment reminder email. Here’s an example.
10 Questions to ask your physician
Source: ahrq.gov

[You can also download this printable leaflet to share with your patients during their visit]

  • Stay in touch with patients after the appointment. You can ask for feedback, check their wellbeing, and track their recovery. You can also send educational material to help them understand their condition and treatment. It will help build trust in your facility.

4. Feedback

Patient feedback is important to ensure the success of your patient engagement strategy.

Providers generally take a patient satisfaction survey after a successful appointment. But, the process to schedule an appointment is not always easy.

For instance, Avtex’s Omnichannel Healthcare Report 2021 reveals that 42% of patients find difficulty in connecting with the provider, which also had them stop communicating with the provider.

Statistics - communication challenges in healthcare

The point is, patient feedback is important not only about the appointment but also across all the interactions they have with your service.

Here are some resources to help you craft your feedback questionnaire.

The next important point is, how are you going to utilize the patient feedback in your process.

If you’re collecting feedback on a paper, you’ll need a data entry person to enter the record on the system and analyze them.

Alternatively, you can collect feedback on a tablet and record the response on the go. Healthcare CRM allows you to create e-forms for collecting feedback, tracking interactions, repeat visits, and more.

After you have collected the feedback, make sure you act on them. That is, analyze the responses and make changes in your processes from time to time.

Use technology in designing patient engagement into care delivery

Healthcare institutions need connected and data-driven patient-engagement technologies to deliver the care they envision. We’ve transitioned from brick-and-mortar institutions to hybrid healthcare systems.

The technologies that are specifically helpful are:

While EHR/EMR systems are provider-facing technologies, CRM, portals, and marketing automation solutions are mostly customer-facing technologies. Let’s look at the role of each technology in improving patient engagement.

EMR/EHR technology

EHR or EMR system helps securely store patients’ health records and make them accessible across the healthcare ecosystem.

Both patients and referring doctors can gain access to health information in just a few clicks. Thus, saving time and money lost in repeat check-ups.

Healthcare CRM

Healthcare CRM software can help you capture inquiries, engage with patients, and reduce attrition. It tracks patient interactions and automates inquiry distribution, appointment reminders, feedback, and more.

Patient portal

Portals allow patients to securely access their health information, test reports, medical history and stay connected with the provider 24 X 7.

Marketing automation

With marketing automation, providers can engage with patients through multiple channels like email, SMS, WhatsApp, and social media easily.

Call-center solution

As mentioned above, it takes a lot of effort for patients to connect with their providers. Call-center solutions in healthcare can help resolve issues at the earliest possible. For example, it can free medical staff of handling queries like appointments, billing, insurance, etc.

Telehealth

Telehealth can expand patient access to care to literally anywhere. Apart from routine/casual consultations, it can help reduce panic by suggesting first-aid procedures during emergencies.

So, these are some of the popular technologies that help improve patient engagement.

The best part is you can integrate all these technologies to get a 360° view of customers and deliver consistent care.

For instance, the ability to access their health information digitally can increase patient and family engagement. It can be made possible through EHR and patient portals working together. Similarly, EMR/EHR integration with CRM can help track the patient journey—not only for one revenue cycle but throughout the time the patient needs care. Furthermore, healthcare CRM can integrate with IVR and cloud telephony solutions to track all the interactions.

When looking for technologies for patient engagement, consider:

  • Accessibility and ease of use
  • Data security, HIPAA compliance
  • Cost-efficiency
  • Integration capabilities
  • Vendor reputation

In the next section, we’ll discuss how LeadSquared healthcare CRM helps you in your patient engagement plan.

How does LeadSquared Healthcare CRM helps in patient engagement?

LeadSquared provides a fully HIPAA compliant healthcare CRM solution with the patient portal and marketing automation to enable care at scale. 

With this, you can automate workflows like appointment reminders, consultation feedback, follow-up routine, lab tests, and more.

LeadSquared allows you to build multiple patient journeys across the range of services you offer. That is, you can create different workflows for each department basis the procedure you follow.

Plus, it seamlessly integrates with EHR/EMR systems, cloud calling solutions, medical billing software, and more to create a unified view of patients.

Trusted by multispeciality like Manipal Hospitals and healthcare providers like Klarity, Form Health, New Hope Fertility, Two Chairs, Nova Vital, and more, LeadSquared is an end-to-end patient acquisition and management platform.

“LeadSquared’s APIs and connectors help us collect the data and integrate it with the system. The dashboards and reports enable us to work with this data and derive great insights from it. Both these features help streamline processes, save time and in turn boost team productivity.”

Kiran Ramakrishna, Assistant Manager, Manipal Hospitals

If you’re looking for a tool to improve patient acquisition, engagement, and management, LeadSquared is the way to go.

Book a quick demo and experience how it helps grow your practice.

What’s the first thing that comes to mind when you provide care for a patient?

Doctors agree that giving immediate and effective treatment is the #1 priority. Even better, if it is something you can prevent and treat in its early stages. 

But to carry out these processes manually is exhausting.

The way we consult a doctor has changed since the pandemic broke out. While patients quickly adopted virtual consultation, several hospitals did not have the personnel or equipment necessary to do so. Most of all, they had no system to manage and oversee patients and their needs.

This brings us to the crux of this article: patient management. A patient management software can help you improve your practice’s efficiency and effectiveness. But before we get into that, let’s delve into what a patient management system does. 

Quick links:

What is a patient management system?
Features and benefits of a patient management system
The best patient management software for your practice

What is patient management system?

A Patient Management System or PMS is a tool to manage your administrative tasks and store patient records. It aims at improving your practice efficiency, delivering timely care, and improving patient experience and outcomes.

A patient management system typically performs the following functions.

  • Automates appointment scheduling 
  • Provides e-forms or intake forms for patients to fill before admission.
  • Records interactions
  • Manages referrals 
  • Allows payments
  • Maintains electronic records of your patients and their medical history
  • Makes it easy for patients to access test results, prescriptions, etc. through patient portals.

These are just some of several features you can use with a patient management system. But you might wonder, why should we digitize these processes? What change can this software create in the lives of doctors and patients? To understand the benefits of a PMS, we need to know the challenges healthcare workers face. 

Challenges faced by healthcare professionals

Today, patients want advanced and efficient care at short wait times. At the same time, doctors and healthcare professionals want to concentrate on treatment rather than paperwork and reports.

Below are some of the most common challenges they face due to the lack of a PMS: 

  • Inconsistent appointments, inefficient processes, and higher healthcare costs. 
  • Have to manually record information of dozens of patients. 
  • Lack of reliable patient history records and gathering. 
  • A lack of information sharing between departments or locations
  • Changes in treatment are rarely communicated on time.
  • Payment processes can be long-winding and involve different insurance companies. 
  • The patient experience worsens with long wait times and inefficient care. 

This is just the tip of the iceberg when it comes to the healthcare. In the meantime, patients have higher expectations of doctors and the healthcare sector.

Your prospective patients consult Google before they choose a provider. For instance, 94% of patients read online reviews when selecting a doctor or provider. Therefore, your online presence has become necessary.

Today, healthcare institutions face a tough competition online as well. Almost every provider has a website. Thus, what differentiates you are patient experience and satisfaction.

So, what can you do to meet these expectations?

The answer is—implement a Patient Management System. 

The features and benefits of a patient management system

As we have seen, administrative tasks take up a lot of time, which could otherwise be spent on patients and delivering better care.

Hospitals and private practices aim at reducing operational costs to increase profitability. A patient management software is a great aid in this pursuit. Let’s look at some of its key features that automates operations.

1. Schedule appointments at ease

Appointment scheduling is an inescapable aspect of any in-person interaction. Recent research shows that:

  • Around 48% of patients prefer to arrange appointments over the phone. 
  • In contrast, 43% prefer to book appointments online. This is a percentage that is increasing every year. 

Several hospitals/clinics are yet to install online channels of communication. This can decrease your chances of patient acquisition

A patient management system can ensure that you effectively schedule any future appointments. It can track and record information from various sources. Thus, allowing you to follow up with patients and reduce no-shows. It makes it simple to book appointments for patients as well. Patients can check the doctor’s availability and book an appointment online.

Healthcare HIPAA Compliant-CRM

Appointment automation immensely reduce wait times and evenly distribute leads among providers. It also manages patient-to-medical-staff communication to confirm diagnostic and treatment sessions.

Some patient management systems like Healthcare CRM integrate with EHR to access and update patient information. Others collect and process critical patient data for use in the billing software.

2. Record patient information and their medical history

Providers should track, store, and access their patients’ medical records.

While both EHR and patient management system can store patient records, they serve different purposes. EHR systems are built to make heath records sharable and accessible across the healthcare ecosystem. Whereas a PMS tool ensures that you have access to all the patient interactions—even if they have consulted multiple departments.

With a PMS software and EHR, you easily get access to patient records, such as:

  • Demographic information
  • Vitals and personalized statistics like age and weight
  • Medical history
  • Drug and allergy information
  • Vaccination status
  • Laboratory test records and results
  • Radiological pictures
  • Payment details 

Before selecting a patient information management system, figure out what you need. For instance, you should be able record, update, and archive critical patient data. It should take place within the system for access during future encounters. 

3. Track all your patient interactions and touchpoints

The PMS keeps track of and optimizes patient contact. It carries out such actions before they even enter the hospital. Electronic intake forms are typically generated by the patient check-in software module. 

These forms are for them to fill out ahead of their visit. These processes speed up a patient’s first clinic or hospital appointment while simultaneously cutting down on time spent completing paperwork in person.

Patients will check-in online once they arrive, and the system logs their wait times. The patient’s wait time information provides metrics for performance evaluations.

HIPAA-Compliance

Patient management software keeps track of:

  • Exam room availability and the progress of each exam. 
  • Users can take notes immediately within the system
  • Patient diagnosis and health concerns.
  • Tracks the medical provider’s performance and care. 

Patient engagement tools are another great asset to your PMS. Most engagement tools are features within the software.

Hospitals, medical offices, and other institutions need to meet healthcare consumer expectations. Most patients expect medical professionals to provide excellent personalized care. They want their providers to:

  • Show compassion
  • Acknowledge their needs
  • Communicate quickly
  • Provide easy access to relevant information.

Patient engagement tools make it easier to urge patients to take an active role in their care. It promotes the development of a collaborative patient-doctor connection. It eventually helps improve patient satisfaction and experience.

4. Medical transactions and billing software for seamless invoicing

Nobody likes to talk about money in healthcare, yet it’s an unavoidable part of the profession. Billing features in patient management systems help to relieve the strain of invoicing. Additionally, Research estimates the CAGR of medical billing software to grow at 5.1% from 2020 to 2027.

This feature in a PMS keeps track of all previous and existing payment details. Along with this, it records prescription details for patients. Hospital billing features validate insurance eligibility when a patient checks in. 

This ensures that everybody is aware of co-payments and insurance coverages. PMS automates the revenue cycle after contacts, prescriptions, procedures, or other services. This is to standardize every patient’s bill and revenue received. Some advanced systems even allow buying prescribed medicines from the network pharmaceuticals.

The software also sends out automated payment reminders when payments are due. In a nutshell, a patient management system:

  • Keeps track of claim status
  • Manages patient accounts 
  • Automates the billing process
  • Sends payment reminders
  • Allows online payment

Another benefit of the payments module of patient management system is it automates reminders through SMS, email, WhatsApp, etc. Thus, you won’t have to check accounts and remind patients to fulfil payments regularly.

5. Predictive reports and improved patient relationship management

Patient progress reports assist you in predicting what your patients might require. The predictions can be based on their:

  • Actions and lifestyle
  • Medical and genetic history 
  • Hereditary conditions and allergies
  • Current health and existing illnesses 
Maintain personalized attention in patient communication

The software helps predict future health concerns after analyzing such factors. It helps you boost patient retention rates. Also, it enables patients to take efforts to avoid preventable diseases. Most doctors will agree that it’s far easier to overcome any illness when you curb it in its early stages. 

Along with predictive reports, PMS helps you create meaningful doctor-patient relationships. Most patient management systems integrate with a CRM tool or are healthcare CRMs. 

Patient relationship management is an essential aspect of hospital management. It helps you identify and close gaps in the treatment journey.

A PMS does this by providing speedy actionable insights about patient needs. For instance, imagine prospective patients leaving the health system following a consultation. This is a signal that you may need to reconsider your engagement plan.

Having access to these data will enable you to create well-informed engagement. This makes patients feel heard and involved, thereby enhancing your patient retention efforts. Patient management software raises the bar in terms of delivering care. It helps medical facilities of all sizes to:

  • Provide personalized patient care with the help of analytics
  • Reduce patient wait times through the accurate distribution of patients to available providers.
  • Schedule appointments based on availability and patient needs.
  • Improve revenue cycles by digitizing billing processes and linking up with insurance providers.

By now, you must have realized the benefits a PMS can bring to your practice. Perhaps, the next question in your mind would be—which is the best patient management system?

Well, we’re here to answer that.

The best patient management software for your practice

You’ll find several tools for the healthcare industry. But remember to implement software that is user-friendly and reliable. HIPAA compliance is a must for security purposes when it comes to a PMS. 

Patients worldwide expect total confidentiality, and doctors provide the same. This can get tricky when you add a patient information collection tool.

The most popular tool for managing patient profiles and relationships with them is the healthcare CRM software. The global healthcare CRM market is expected to reach $37,624.0 million by 2030, registering a CAGR of 14.1% from 2021 to 2030. The growth is due to the range of services and tools it provides for automating patient journeys and improving communication between patients and providers.

If you’re on the lookout for a secure and efficient healthcare CRM, try LeadSquared!

LeadSquared CRM is a HIPAA compliant patient relationship management software. It allows you to:

  • Automatically distribute appointment requests and other inquiries. You can do this depending on your specified criteria within the CRM. (you can include criteria such as age, gender, location, etc.)
  • With account management, group members of one family together as a unit.
  • Personalize communication at each phase to improve patient involvement and communication.
  • Build multiple journeys (automated workflows) for the types of services you provide.
  • Access all patient demographics, social profiles, and behavioral data.
  • Collect post-appointment patient feedback

“We’ve roughly doubled the amount of leads we’re able to manage. A lot of that is due to the time-saving factor of working with LeadSquared. We’re able to cut down our turnaround time responding to inquiries and reach out to and communicate with many more leads.”

Tamara Young, Director of Marketing, PSYCHē

Click here for a quick demo!

What are the two departments that carry the most weight with customer acquisition?  

You’re right. These teams are: 

  • Sales  
  • Marketing 

The 2018 Nashville Analytics Summit highlighted that aligning sales and marketing is crucial for cutting acquisition costs. Tightly aligned organizations may save up to 30% on customer acquisition costs. Additionally, they experience 20% better customer lifetime value (CLV).

It brings us to the crux of the article. How to calculate your customer acquisition cost, what factors to consider, and ultimately, what can your sales and marketing teams do to reduce CAC? 

Let’s get started. 

Quick links: 

What is Customer Acquisition Cost? 
Factors that contribute to customer acquisition costs
Customer acquisition cost formula and example
Online CAC calculator
Industry-wise average CAC
Channel-wise average CAC
How to reduce the acquisition costs
Tools that help reduce CAC

What is Customer Acquisition Cost (CAC)?

Customer acquisition cost (CAC) refers to the cost of getting a new client. It includes the sales and marketing expenditure and operational costs such as resources (or teams) involved in acquiring a new customer. 

CAC is a crucial business metric as it determines the growth of an organization. By examining CAC, you’ll be able to realize whether you’re generating enough ROI or not.  

While we talk about what is customer acquisition cost, it’s equally important to understand what it’s not. For instance, don’t confuse CAC with lead acquisition cost. Often, advertising tools like Google Ads show conversion numbers. But these can be sign-ups and not necessarily paying customers.  

Also, there are a lot of variables in calculating the customer acquisition cost. Many businesses fail to understand what goes into their customer acquisition costs. Which is and always should be the precursor to calculating CAC. So, before we delve into the formula for CAC, let’s examine what contributes to our CAC.  

Factors that Contribute to Customer Acquisition Costs

Several companies tend to narrow down the factors that affect their customer acquisition. But this can lead to inconsistencies when calculating CAC. It can be doubly hard to determine what spending goes into CAC as it differs across industries. But you can whittle down this list to the following factors: 

1. Advertising and creative costs

These are the investments for website banners, ads, and more. The amount you spend on content creation is generally considered creative costs. It can also include the agency fees (if you’ve hired one), publisher platform fees, or the cost of hiring new employees to help you with the operational tasks. 

2. Employee expenditures

It refers to salaries, bonuses, and expenditures you offer your customer-facing teams. These are generally marketing, sales, and customer service teams.  

Investing in efficient and productive personnel is usually a good idea. So, if you think it is getting too expensive, pay great care to how you remedy this. Implementing salary cuts or layoffs is only a temporary fix to reduce CAC. 

Instead, figure out ways that ensure no talent goes to waste. You can do this by equipping your team with the right tools to maximize efficiency. Marketing automation, for example, can boost their productivity by automating routine work. 

3. Technical or software expenses 

The software your advertising and sales teams use is what we call “technical costs.” For example, if you bought an SEO tool to track the progress of marketing campaigns, it would be a technical cost. 

Many companies may not realize the significance of technical tools for customer acquisition. But a recent study found that 80% of businesses believe automation helps them send better-quality communications, improve client retention, and acquire new customers. 

4. Maintenance cost 

Generally, you have to spend money on software maintenance and optimization. This cost would include utility expenses and facility storage fees for large-scale enterprises. It is the money you’d spend on upgrades and changes to enhance the CX

5. Merchandise and overall production costs 

The cost of physically manufacturing content is the production cost. If you’re filming a video, for example, you’ll have to buy a camcorder, build a set, edit the footage, and so on. These costs add up fast, especially if you’re paying someone else to create your content. 

These are some of the expenses that contribute to your overall CAC. As I’ve mentioned, this doesn’t apply to every company or brand. But is a general list of the expenses most companies incur over time.  

Now that we know which expenses contribute to CAC, let’s get into the formula.  

Customer Acquisition Cost Formula and Example

Calculating CAC is pretty straightforward once you know the formula. 

CAC-customer acquisition cost formula

For example, let’s imagine you own a sneaker brand. Your contributing expenses for customer acquisition in May are: 

  1. $100 on Google and Facebook ads and banners.  
  1. $500 on technical costs for sales and marketers.  
  1. $25000 for the sales team’s salary. 
  1. $25000 for the marketing team’s salary.  
  1. $250 on the merchandising and inventory storage space.  

Once we add all these figures, we reach around $50,850 in total. In this month, you manage to acquire 750 new customers. So, the CAC for May will be: 

CAC= 50,850 ÷ 750= $67.9 

With that, we know how to calculate the customer acquisition cost for a company. If you want to quickly get an estimate on your acquisition cost, use the following online customer acquisition cost calculator. 

Online Customer Acquisition Cost Calculator

(Enter your sales and marketing expenses for a given period and the number of customers acquired in that period. You can also enter an approximate value to get an idea of your CAC.) 


Enter total expense in sales and marketing ($):
Enter total number of customers acquired in a given period :

Your Customer Acquisition Cost is: $

The next step is knowing the CAC benchmarks across industries to know whether you’re in the red or good to go.  

So, let’s get right into some of the most well-known CAC benchmarks across sectors.  

Industry-wise Average Customer Acquisition Cost

“The biggest challenge in any business is sales, and the cost of acquisition is an inextricable part of it. As compared to other industries, the cost of acquisition is much higher for the hospitality industry, which slows down sales.”

Dr. Joseph Britto, Co-founder and Director, Acron Homes & Hospitality

Getting your ad spend right is half the game, and for early-stage start-ups, the most difficult battle to win.  

Most businesses strive to maintain their CAC as low as possible. However, the average for each industry varies due to several contexts. Let’s get into some of the industry average CAC worldwide:  

Benchmarks - Industry-wise average customer acquisition cost

Please note that the acquisition cost varies according to the consumer segment you wish to target (B2B or B2C) and the region you operate in. They may also be impacted by socio-economic factors. Use these benchmarks for reference only. 

1) Education

Firstly, most educational customer acquisition costs are higher than in other sectors. According to studies, the education industry has an average customer acquisition of $862. This is most likely owing to the education sector’s highly selective nature.  

Furthermore, educational advertising has yet to fully expand online. On the other side, ed-tech companies may have much lower CAC. The CAC for an ed-tech company in the K-12 space can range from $137 to $821 per student.  

Whereas traditional education, particularly higher education, is among the costliest. The sources for expenditure when it comes to higher ed are still largely offline. Word of mouth, rankings, and more are a major influence in the education sector.  

2) E-commerce 

A Shopify survey found the following rates in various e-commerce industries. Ecommerce brands and companies, depending on the product, tend to have low CAC rates. We can attribute this largely to their online presence, which reduces inventory costs. For instance, most e-commerce brands do not operate offline. It drastically reduces the number of staff, rent for the space, and other such expenses.  

The mean CAC by category for e-commerce businesses with fewer than four employees is as follows. 

Benchmarks - ecommerce customer acquisition costs across categories

3) The insurance industry 

Insurance client acquisition costs are notably vital because they are the lifeblood of any agency. For both established organizations and disruptors, acquisition marketing has created an imbalance.  

Insurance companies have the most expensive customer acquisition costs of any industry. The average cost of acquiring a new insurance customer can go up to $900 per person.  

Most insurers spend ages trying to onboard a new client. The lack of proper tech and long-winded processes cause further issues. Insurance agencies must invest in customer onboarding automation to ensure that they don’t incur losses.  

4) Fintech / Credit cards 

The customer acquisition cost in Fintech depends on the sources through which companies acquire customers. However, the average CAC for credit cards in America is $80.  

This is among the lowest CAC rates across industries worldwide. Strangely, Fintech apps have serious app uninstall rates (>35%). Also, the cost of acquiring a customer varies greatly amongst banks. So, these CAC benchmarks should be taken with a grain of salt.  

5) SaaS companies 

An article by HockeyStack found that the average SaaS company CAC is $205.  

SaaS CAC is the midpoint of industry-wide typical client acquisition expenses. But, within the SaaS sector, there are several different industries. Another data set by First Page shows the following CAC for SaaS companies.  

Benchmarks - SaaS customer acquisition cost

Now that we have a rough idea of the CAC rates across industries, let’s look at the customer acquisition cost per channel.  

Source or Channel-wise Average Customer Acquisition Cost

Again, the CAC varies according to region you operate in and your target consumer segment (B2B and B2C). 

Here’s the channel-wise average customer acquisition cost as shared by FirstPageSage

Benchmarks - Source or channel-wise average customer acquisition cost

1. SEO 

The practice of optimizing your site so that it ranks highly when searched is search engine optimization (SEO). For SEO setup charges, you should anticipate paying between $4,000 and $10,000. 

If you work with an Online marketing agency, you may expect to pay around $1,000 each month. To figure out how much it costs to acquire a customer with SEO, tally up all of your expenses.  

Total manpower and other financial investments can be part of this. After that, divide that number by the number of SEO-based conversions. Use analytics software to track the number of conversions.  

2. Email marketing 

Email marketing expenditures are comparable to the price of running SEO or PPC campaigns. Initially, you should expect to pay anything between $3,500 and $10,000.  

Each eligible visitor costs between a few cents and $4, with your Internet marketing agency receiving roughly $500 each month.  

72% of adults in the United States also prefer to communicate with companies via email. And because the folks on your mailing list have chosen to be there, it usually generates high-quality leads.  

You can also use email automation to follow up with users based on their behavior on your website. You can send them customized content to encourage their progress through the sales funnel

3. Social media marketing

As billions of people are active on social media, it’s obvious to use this channel in your customer acquisition strategy. The June 2020 emarketer survey reveals interesting insights on purchases made via social media platforms. 

Statistics - purchase made via social media platforms

As mentioned above, the social media customer acquisition cost ranges between $212 to $658 according to the consumer segment. While social media can also contribute to organic customer acquisition, paid or promoted posts are quite popular for instant returns.  

Generally, brands employ in-house social media marketing teams to interact with shoppers. They also outsource creatives and posts to digital marketing agencies, whose fees vary according to the engagement duration and deliverables. 

4. Content marketing

Initially, content marketing might cost anywhere between $5,000 and $12,000. If you use timeless topics, your content can produce results for years after. You won’t have to pay anything to keep bringing in new clients. 

There are no ongoing fees associated with content marketing. As a result, as more clients convert from it, your CAC for each content will start to reduce. 

Furthermore, content marketing provides value to the purchasing process. It accomplishes this by informing users about items and services they might be interested in. 

Consider the case of a perfume company. Write an infographic with recommendations for increasing the shelf life of a fragrance. Users who find your article helpful are likely to share and utilize your tips.  

5. PPC 

Pay per click ads may look expensive but are rewarding if you aim for quick growth. You can run PPC campaigns on search engines, social media, and public forums.  

The only way to reduce the customer acquisition cost in PPC ads is through constant optimization. That is, analyze your ad performance and optimize ad copy, landing page copy, and creatives for conversions. If you go for an agency to help you with PPC campaigns, include the agency fees in your CAC calculation.  

6. TV ads 

TV ads have been a popular channel for customer acquisition for decades. However, with other digital channels in play, it becomes difficult to attribute this source of customer acquisition. One way of measuring customer acquisition through TV ads is by calculating incremental sales.   

Finally, with the meaning, industry benchmarks, and sources of CAC out of the way, let’s get into some quick tips to reduce CAC.  

Tips to Reduce Your Customer Acquisition Cost

1. Prioritize and segment leads  

It is critical to direct advertising strategies and resources to the relevant audience. Create a list of the target audiences for your products and services.  

It will be much easier to engage with them on favorable terms after. Marketers in 2022 will segment their audiences and value quality over quantity. Similarly, salespeople plan to prioritize reaching out to interested leads.  

Lead-Segmentation-real-estate-CRM-Software

2. Concentrate on retargeting customers 

Retargeting is a useful strategy for businesses that want to stay in front of new clients. Customers frequently abandon unfinished operations on websites and apps. They may refuse to purchase for a variety of reasons. Sometimes, just because they got distracted.   

A slight nudge in the right direction might sometimes persuade a prospect to make a purchase. In just 4 weeks, retargeting can result in a trademark search lift of up to 1,046%.   

3. A/B test and analyze campaign performance 

It is critical for marketers to A/B test various aspects of their landing pages. Customers that have a better user experience (UX) with your website are more likely to feel happy with it.  

Better UX design can lead to higher client happiness, which increases sales. A/B testing allows a business to discover what its customers desire to experience.  

A/B testing product titles, forms, buttons, layout, and more is necessary to improve a website’s landing pages. Companies can use A/B testing to see how slight changes on their website affect click-through rates. 

4. Sales and marketing automation

Using a sales and marketing automation solution can help you save money on customer acquisition. Because fewer employees are required to focus on mundane activities, automation inherently saves money.  

A corporation can conceive of ways to collect contact information in the future for targeted marketing. Customers might agree to be on email lists in exchange for the value of gaining experience through gated content. Because it frees up other resources, automation boosts conversion rates and lowers acquisition costs. 

These are just some simple tips to ensure your CAC rate stays low. Apart from these, another tip is to provide stellar customer service. We are moving into a customer-centric world, and quality customer service can help increase retention and thus reduce CAC.  

In the next section, we’ll look at tools that can help you reduce the customer acquisition cost. 

Tools that Help Reduce CAC

The best way to measure and meet your CAC goals is to invest in the necessary tools. Here are some quick recommendations.  

  • Every lead is important. To ensure you don’t miss out on follow-ups and meetings, CRM and meeting scheduling tools like Calendly are important. Scheduling tools sync your calendar in real-time—saving time and effort in setting up meetings. These are also helpful when you’ve meetings across time zones.  
  • If you invest in email marketing, having tools to track email performance becomes crucial. Some good email tools are Mailchimp and SendFox.  

So, these are some of the tools you can use to improve productivity and hence reduce CAC.  

In your customer acquisition journey, keep one thing in mind—automation. Don’t let your human resources spend their time on mundane, repetitive tasks.   

As Henry Ford says,  

If you need a machine and don’t buy it, then you will ultimately find that you have paid for it and don’t have it.  

So, don’t wait for it. Book a quick demo to understand how LeadSquared’s Sales CRM can help you trace the customer journey with lead source attribution, lead management, and eventually reduce your CAC.