Customer Acquisition Cost (CAC), simply three English words arranged in a sequence that has no meaning. Without the Internet, data and a way to measure and calculate; this metric didn’t exist. All told, CAC is how much it costs to convert a potential customer into a buying customer. This article, hopefully, will explain a little more about it, how you can find out yours and then how to optimise it.
What Good Is the CAC Metric?
Customer Acquisition Cost is a major number. It’s one of the metrics that allow outsiders (think investors) know if your business is scalable. How much money would it cost to gain $X? from customers?
CAC can be used to make smarter campaign choices within your business. Once you find out how much it costs you to make $100 in revenue, you’re able to make changes and alterations within your own flow to increase profits!
Okay, How Do I Work Out My Customer Acquisition Cost?
At a high level, working out your CAC is simple. It’s the sum of all your marketing costs divided by the number of customers you obtained over a period. For example, if you spent $1,000 in a month on PPC advertising and got 37 new customers, your CAC would be $27.
However, as with most things, it’s not that simple. There are some factors that make this calculation a little different and can cloud the water. For instance, if you’re in the early stage of some SEO work, the cost incurred for that will skew your CAC (as SEO takes some time to glean results). For good measure, you should have multiple CAC variations aimed at the different angles you’re looking at. We’ll walk you through some of the common examples. Company A has a simple, but a flawed method and Company B has a fantastic method.
Jeff’s Organic Foods
Jeff owns a make-believe eCommerce company that sells organic food products. In August, he spent $100,000 on various advertising campaigns, including Social Media PPC, Google AdWord PPC and some print ads in the local newspapers.
From his platform, he can see that that campaign saw 10,000 orders. Using the simplest CAC calculation delivers him a CAC figure of $10.
We’ll now see how that CAC calculation doesn’t mean what you think it means.
The average checkout amount on Jeff’s store for the period was $25. He has a standard mark-up of 100% across the board. That means out of all sales, they’re only making $12.50 per sale.
While this is the quick and dirty way of making the calculation, it’s not something that you’d take to the bank. What happens if customers fall in love with Jeff’s customer service and never buys from a brick and mortar grocery store again? What if they only ever buy from them from now on?
Customer Lifetime Value (CLV) is the metric to resolve this. You can find a great CLV calculator here. In general, this metric helps you form a more accurate understanding of what the customer acquisition cost means to your company.
ExampleSoft is a fictitious SaaS company that provides cloud-based software to manage Sales Contacts and CRM. The cost of distributing the software is low, as it is cloud-based. Their customer onboarding process is good, so their customers require little to no support and their retention rate is high because of the pain and hassle of moving to another platform.
SEO work has succeeded and they are top-3 on all Search Engines. They have an expert sales team working at minimum wage and their call centres are based in a rural town. The company has strategic partnerships with other companies that provide a steady stream of referral clients.
- Cost of new customer sales support call centres: $1,000,000/year
- Cost paid to strategic alliance partners per customer: $1.00
- Monthly spending on search engine optimization: $20,000/year
- New customers generated in the year: 1,020,000
CAC =($1,020,000/$1,020,000)+$1.00 per customer = $2.00
ExampleSoft has used a customer retention calculation to determine that its customer lifetime value (CLV) is $2,000. That means this particular company is able to turn a $2.00 investment into $2,000 of turnover! This is both attractive to investors and a signal to the marketing team that an effective system is in place.
Make Your Customer Acquisition Cost Better!
We all want to be ExampleSoft in these examples. The reality is that our advertising campaigns can always be more effective. Improvements can be made to Customer Loyalty and value from Consumers. There are a few ways your business can improve your CAC:
- Improve on-site conversion metrics: Continue tweaking! Always improve. Use Google Analytics and use A/B testing to reduce cart abandonment rates, improve landing pages etc. Mobile and Speed optimisations are an ongoing thing that needs to be done – don’t discount the importance of tweaking.
- Enhance user value: Customers bring customers. Make sure that with every sale or client their value increases. When someone is happy with the offering, there’s a correlation between happiness and spending more.
- Implement customer relationship management (CRM): Nearly all successful companies that have repeat buyers implement some form of CRM. A happy customer is a constant customer.