What is Customer Acquisition Cost?
Customer Acquisition Cost (CAC) is a metric that is becoming increasingly popular as businesses look to justify rising marketing costs. Learning what the CAC is, how it can be measured, and how it can be improved are critical for companies trying to maximize their marketing dollars.
The CAC metric should be important to several parties within an organization. Of course, management wants to see the results of their marketing dollars, and the marketing team wants to look at the impact their efforts have on acquiring customers. But the sales team, and their costs and efforts should also be calculated into the equation, so they too should be interested in learning what the costs are and trying to determine whether they can be reduced.
Customer Acquisition Cost is based on the total sales and marketing cost required to earn a new customer over a specific period of time. The cost includes all program and marketing expenses, employee costs and overhead associated with attracting new leads and turning them into customers. Ideally companies want to reduce the cost of customer acquisition, while simultaneously limiting customer attrition so that the customer’s total lifetime value increases.
A successful marketing campaign will generate interest in products or services. Leads from such a campaign will be followed up on by the sales team; the more effective the campaign is, the easier it is for the sales people to do their job, making the whole sales process more efficient and less costly.
The formula is simple: Customer Acquisition Cost = Cost of Sales and Marketing for a defined period of time divided by the number of new customers acquired from those efforts.
What should be included in the cost calculation?
The cost of advertising
Companies should look at the total cost of all advertising campaigns that are being run and should be familiar with the ROI for each campaign to ensure that the campaigns are effective.
This should include salaries, commissions and bonuses for all staff that are working on customer acquisition efforts (so both marketing and sales). We all know that good employees are worth the investment, so it’s important to keep that in mind, particularly as you look to rein in CAC once your analysis is complete.
Graphic design work and all content development may be handled outside of the sales and marketing teams. Additionally, costs for brainstorming and developing strategy and content ideas should be included.
Any work that is related to the technical aspect of marketing a new product or product line, including changes to the website, a customer relationship management tool that allows marketing to funnel leads through to a sales, etc. would all be included in this cost.
Printing/Publishing and Production:
This includes all the costs associated with creating materials that are designed to acquire new customers. Ad production and cost to air on TV, print, or even mail it, paid social media, costs associated with creating video, all need to be calculated to accurately show what the cost associated with acquiring a new customer.
Once you know what your CAC is, your work is not necessarily through. The cost associated with acquiring new customers needs to be compared to the Lifetime Value (LTV) of a customer. If it costs you $100 to bring in a new customer for a $29 product, and that customer will never need to purchase another item from you again, you have an issue. But if it costs $100 to bring in the same client, who will spend $29 monthly for the duration of their relationship, that’s a different story.
The reality is that although it’s prudent to be sensitive how much it costs to bring in a customer and to try to bring that cost down as much as possible, it doesn’t necessarily need to be less than the initial value of the product. Many companies might look at a $100 acquisition cost, and reduce commission, when in actuality INCREASING commission, and giving bonuses for KEEPING customers may produce a better result down the line.
The other thing to keep in mind is that Customer Acquisition Cost (CAC) will NEVER be $0. The old adage that it takes money to make money is true; even if you think you can promote a product or service on social media, it is not free. It will cost money in terms of “people time” and production to get those customers. If you aren’t paying yourself, you still need to calculate what you would pay SOMEONE to do that work, since your goal is to make enough money that you can hire and expand. If the costs don’t add up, you will find yourself spinning your wheels, unable to bring in enough profit to make your business worthwhile.
To get a sense for how your CAC compares to others in your industry, here are some basic stats for commonly evaluated industries. (Source: Propeller)
- Travel: $7
- Retail: $10
- Consumer Goods: $22
- Manufacturing: $83
- Transportation: $98
- Marketing Agency: $141
- Financial: $175
- Technology (Hardware): $182
- Real Estate: $213
- Banking/Insurance: $303
- Telecom: $315
- Technology (Software): $395
What do I do now that I know my CAC?
The ideal scenario to see is that CAC should be about ⅓ of your total Lifetime Value of the customer. If it is higher than that, that is great, but you should know that you could be spending more, and may ultimately be missing out on opportunities.
If your CAC is a higher proportion of your LTV, there are a few things that you can do to reduce the total cost of customer acquisition:
Streamline your sales cycle:
By decreasing the typical sales cycle, you actually benefit commissioned sales people by freeing up their time to pursue additional opportunities and influence more sales in the same period of time. Adjustments can be made to your sales cycle by improving lead generation techniques, improving customer relationship management systems and the marketing support for active leads, among other things. It is one of the areas where your sales and marketing people really can make a significant impact by working together!
This is another area where marketing and sales collaboration can be effective in bringing down customer acquisition cost. The more you can do to make it simple and straightforward to allow customers to get information they need from your website vs. calling a sales person, the better off you will be. Think about it this way: if you can pay someone to create material and a system that will allow multiple orders to be processed with no salesperson interaction, you are ahead all of the cost of that sales person. This doesn’t mean that the salesperson needs to be cut out of the equation altogether. A sales person is responsible for staying in front of leads to close the deal. Just make sure that the sales person doesn’t need to spend even more time on the detail of the actual sale.
Obviously, if the equation that you are aiming for is one that takes value of the customer over the cost of their acquisition, increasing the value of the customer can increase your ratio. Do this by engaging customers post-sale, offering new products that will enhance their relationship with you, and collecting customer feedback to see what they would like to see from you.
Expand your customer referral network:
Allow your customers to be part of your sales team (for free!). Encourage customers to refer others. You will likely find that customers acquired through this method will be much lower than your other customers, and expanding this network will decrease your customer acquisition cost over time.
The bottom line is that knowing your Customer Acquisition Cost and building your business with that in mind is critical for your continued growth and success. Marketing, particularly digital marketing and marketing automation, can go a long way in reducing that cost so that you can develop a strong, profitable company.
Want more ideas about how to use marketing to increase sales and reduce your overall Customer Acquisition Cost? Call us at (509)842-0782 or send us an email at [email protected] to see how we can help!