Customer acquisition cost: the metric to rule them all
Ambiguity over customer acquisition cost (CAC) is costing your business, writes Cade Witnish.
As the business adage goes, ‘You can’t manage what you don’t measure.’ Yet, I am surprised with the number of managers I talk to who are willing to ‘wing it’ with their marketing spend.
This is perfectly illustrated by a recent conversation I had with a client over how they were going to split their marketing budget for the next quarter. They said they would go with what had worked last year: 50% on radio, 30% on people handing out brochures and 20% on digital activations.
When I enquired how the client knew it worked, they couldn’t attribute sales directly to a particular marketing channel. They’d met their sales target and had simply assumed the marketing mix they’d landed on had done the trick.
My agency works with a lot of startup companies and one of the most important factors a brand new business needs to establish is their customer acquisition cost (CAC). This is often the first thing investors want to know and is critical to keeping the lights on. If it’s going to cost $100 to acquire a customer for a $50 product, this is unlikely to be viable. Early identification of this CAC mismatch enables us to review, alter the solution, value proposition or target customer.
Mature businesses are often more entrenched, have already found product-market fit and have an established customer base, which can make knowing the true customer acquisition cost feel less urgent and more opaque. Make no mistake; this complacency will be costing your business. When CEOs ask how to assess the value their marketing team is adding, I tell them to ask about their organisation’s customer acquisition cost. If the team can’t provide the figure immediately, and outline a strategy to lower this, it’s almost certain that the organisation is throwing money away. It’s like driving with your eyes closed.
There is no point in acquiring customers without knowing what it costs you to acquire them and what their lifetime value is going to be. These costs can be hidden, easily forgotten, or glossed over.
Make it easy to compare the effectiveness of each marketing channel. The best place to start is by figuring out your CAC with a back of an envelope calculation. Start by calculating your marketing expenses for every channel you used to create leads and customers for the past six months. Then work out how many customers you acquired for the same period for each marketing channel. Finally, divide your expenses by the number of customers you acquired for each channel. This is your basic customer acquisition cost.
The wonderful thing about digital marketing is that it is measurable, trackable and keeps you accountable. Digital tracking measures can be woven into all marketing executions enabling your organisation to effectively track its CAC through-the-line.
The final piece of the puzzle is to work out what the average lifespan and spend of a client is. For example, you may be happy to spend $100 to acquire a client who’s first sale is $50 on the premise that over their lifetime they will spend $1000.
You might be surprised to see that some channels have a CAC that is higher than the average sale. Some of our clients have a CAC that is up to seven times higher than the initial sale. This is why the bulk of their marketing efforts are spent on retaining existing customers, cultivating their loyalty and encouraging advocacy.
Loud&Clear began as a start-up and MVP lean start-up principles continue to guide our business. Our agency uses customer acquisition cost to inform digital marketing services, website development, assets used and social media spend.
While cost-per-acquisition isn’t the only marketing metric that matters, it’s the essential measurement marketers need to know to determine true return on investment.