Numbers don’t lie. It’s as simple as that. As analytic software becomes more accessible, the number of metrics a business tracks is on the rise. Within the past decade, businesses and investors have started to pay more attention to one particular metric, the customer acquisition cost (CAC). Customer acquisition cost is exactly what it sounds like – the cost of obtaining a new customer. Employees use the CAC to determine their company’s return on advertising spend (ROAS). Investors can eyeball the CAC to get a feel for how profitable a company is. No matter whether your company is being run out of your garage or ready to go public, you should know both how to calculate your CAC and how to reduce your marketing expenses.
How to calculate your customer acquisition cost (CAC):
There are multiple ways you can calculate your CAC, but here’s the simplest way to do it:
Divide your total costs (e.g. advertising spend, overhead, salaries, etc.) by the number of customers you earned or number of orders placed (e.g. e-commerce orders) in a given period of time. Feel free to pick whatever time period you like, from one week to up to a year.
CAC = Total Ad Spend / Unique New Customers (or orders)
For example: Let’s pretend that your company spent $200,000 last month, and you acquired 2,000 new customers. Your CAC would then be $100 per customer.
How can you tell whether your Customer Acquisition Cost is reasonable or alarmingly high? Your CAC depends on the following factors:
- Customer behavior. Having a higher CAC is okay if you can make up the cost in having a high customer lifetime value (CLV). If your business model is set up for customers to make repeat purchases or requires that they pay monthly membership fee, those customers generally have a higher customer lifetime value. If your customer has the option to purchase frequently, make sure you forge a strong relationship with them.
- Marketing channel. Certain marketing activities are more affordable than others and yield better results. Inbound marketing efforts such as writing blogs or sending weekly newsletters are much more cost-effective than designing and mailing out monthly flyers. If you’re trying to plan where your marketing efforts should go, split them into different categories, such as pay-per-click, email marketing, etc. Before you dump the majority of your spending on pay-per-click (PPC) ads, Search Engine Land claims that more than 80% of people ignore sponsored content in their search engine results.
CAC vs RoAS
What is Customer Acquisition Cost or CAC?
When it comes to customer acquisition, there are two metrics that people use to measure effectiveness: CAC (also referred to as CPA – Cost Per Acquisition) and RoAS (Return on Ad Spend)
Customer acquisition cost, or CAC, is the amount of money spent on sales and marketing required to close a deal. It is calculated by summing a company’s total sales and marketing spend and dividing it by the number of new customers. Companies can calculate CAC for a given time period or all time,and is helpful to compare the effectiveness of different marketing tactics and strategies. A lower CAC is better, as it suggests your marketing and sales teams are efficient and properly scaled.
The average RoAS may also vary from one medium to the next. It may not be effective to compare RoAS across different campaigns, without first checking the average RoAS figures for that specific medium.
What is RoAS?
Return on ad spend, or RoAS, is a measurement used in the world of advertising to compare revenue to the cost of advertising campaigns. The ultimate goal of this calculation is to measure the effectiveness of your marketing campaign. As long as you know how much you’re spending and earning at that particular level, you can calculate ROAS. For all intents and purposes, ROAS is practically the same as another metric you’re probably familiar with: return on investment, or ROI. In this case, the money you’re spending on digital advertising is the investment on which you’re tracking returns.
How to calculate RoAS
ROAS is calculated by dividing your total revenue with your advertising costs.
ROAS = Revenue / Advertising Costs
Bring in the leads with inbound marketing.
Inbound marketing is the solution to your lead generation problems. Did you know that inbound marketing, a content marketing methodology, produces 3 times the amount of leads and costs 62% less than outbound marketing methods? No matter who your ideal customer is (e.g. consumer or business), inbound marketing can help make the most out of your marketing spend and lower your CAC.
What is CAC-to-CLV?
This metric compares the customer’s acquisition cost to the revenue that customer will provide over time. It helps businesses know if customers churn before they start contributing profit to the company. Support leaders can use this information to discover if they need to invest more in customer support tools if this is the case.
A little bit of inbound goes a long way.
Your goal as a business is to be as profitable as possible. If you don’t have the budget or the bandwidth to expand your business, focus on reducing your CAC. According to HubSpot, companies that practice inbound marketing have a 61% lower cost per lead than businesses using traditional marketing methods, such as cold calling, mailers, magazine ads, etc. Inbound marketing can give you more bang for your buck. When the leads keep pouring in and you have a positive marketing ROI quarter after quarter, don’t be surprised when your marketing budget increases. HubSpot found that 67% of companies that had a greater marketing ROI than the previous year ramped up their marketing budgets.
Invest in your 24-hour storefront.
That is, your website. Yes your website needs to be user-friendly, especially if you have an ecommerce website (hello abandoned cart). Your site also needs to entertain your guests. Blogging on a regular basis is a great way to create more indexable pages (i.e. pages that Google’s robots can find on your website). In other words, blogging makes for one more reason for guests to stay on your website, which will make it rank higher in search engines results.
Fun fact: According to HubSpot, 57% of companies that blog on a monthly basis acquired customers thanks to their content marketing efforts.
Form a relationship.
Buzz isn’t just a noise a bee makes. Dramatically cut your CAC by creating happy customers; word-of-mouth from satisfied users is quite literally free advertising. Make your customers feel like they matter. Try creating a loyalty program or sending customers valuable “inside” information using an automated work email workflow.
Another underutilized – and free – tool you can take advantage of is social media. According to HubSpot, social media has a 100% higher lead-to-customer rate than outbound marketing.
Inbound marketing is an effective way to generate high quality leads, while maximizing your marketing budget ROI. Contact our inbound marketing team for a free consultation.