Most online businesses rely on multiple paid marketing channels to bring in customers. A common metric used to measure marketing campaign performance is customer acquisition cost (CAC). The goal is simple, spend the least money to get a paying customer.
The simple formula of calculating the CAC is
CAC = total marketing spend/no. of new customers
The CAC formula is too simplistic
The problem with the above formula is that it’s oversimplistic. In reality, your expense to acquire new customers is more than just a marketing spend. The money spent on marketing resources (full-time, freelancers or your own time) and other overheads such as rent, hosting, tool subscription should also be accounted for. The risk of using only your marketing or ad spend is your CAC will be underestimated and incomplete.
To better calculate your CAC, use this guide to make sure everything you need is included in the total costs.
How do I know if my CAC is good enough?
When you have a more accurate CAC number, the question that most people have is "Is my CAC good or bad?" Suppose there are two businesses A and B, A calculates a CAC of $ 10 and B calculates a CAC of $ 100. Which is better?
That was a trick question, the answer is that it is impossible to know which one is better. Let's try that question again with a couple of more data. Business A has a CAC of $ 10 and your average customer spends $ 8, B has a CAC of $ 100 and your average customer spends $ 350. I hope this makes it clear that asking if the CAC is good or bad is the wrong question. That was a hypothetical example, but in reality the CACs vary significantly. For example, a B2B business can spend up to $ 264, while a travel company can have a CAC as low as $ 7..
Make sure that the total purchase value of each customer is greater than the one you spend to acquire them
Acquiring customers who buy is only half of the equation, you must also make sure that the total purchase of each customer is higher than what you spend to acquire them. This is known as the customer's life value (LTV), which we will analyze in this post.
A more pressing question is how does your CAC compare to the LTV
Given that the CAC varies according to the objective of your business and the business you are in, a more urgent question is: how does your CAC compare with the LTV and what should you do if your CAC is too high? If your CAC: LTV is 1: 1, you are losing money every time you bring a new customer.
In general, a good proportion is 1: 3 or higher. When the relationship becomes too high, you may be spending less on marketing. Calculate your customer LTV to know on average how much your customers are worth and compare it to your CAC. Is your CAC acceptable?
What can I do to reduce CAC?
If you find that your CAC is high, do not worry. There is a lot you can do to decrease it. But first, understand the cause of your elevated CAC. Do this by going back to the CAC formula and breaking it down. To lower the CAC, you can reduce the total cost of sales and marketing or increase the number of new customers.
Tip: It is often easier to control your costs than to magically find new clients. The secret is to segment where possible and isolate the fastest way to reduce your CAC with the least impact for your business. Some potential ideas:
- To reduce your marketing cost, can you change your budget to channels that convert customers better than others?
- Can you invest in marketing automation to reduce manual effort?
- To increase the number of new customers, can you identify patterns in your customer groups, for example, by age, where are they from, what devices do they use, or when do they normally buy?
For each factor within the CAC formula, slice and dice each factor to understand which are the largest contributors to your CAC and reduce them or increase them accordingly.
Tips to reduce your CAC
Here are some tips to reduce the cost of acquisition, although the key to success is testing. Use the diagram to get some ideas for reducing your CAC, then use the A / B tests to methodically experiment with those ideas and see the results.
Simplify decision making by focusing on the right metrics
There are a lot of metrics you can see when you evaluate your paid marketing efforts. The trick is to know which ones are really important so you know what to focus on. In DataCue, we want to automate this type of analysis so that you no longer study endless measurements and obtain an initial advantage in solving problems.