For many companies, marketing can seem like a black box that may not always deliver the performance you expect. For example, would you rather spend $ 500 on search engine optimization, paid advertising, or just burn the money. According to the US Small Business Administration., a company that earns less than 5,000,000 a year should spend between 7% and 8% of its income on marketing.
This budget should be divided between your branding costs and your business promotion costs. But how do you make sure the money is spent well?
If you are spending money on marketing, have a marketing plan, and are getting customers, but not making money, then you probably need to take a look at CAC or customer acquisition costs.
What is CAC, how is it calculated, and what steps can you take to improve it? By the end of this post, you’ll know how, what, and when to start tracking CAC to improve your marketing spend, and it will become a long-term part of your business plan.
Meaning of CAC
CAC stands for customer acquisition cost. Describe how much a business needs to spend to win a new customer. CAC marketing is now used by many companies that use web analytics or intelligence to make data-driven decisions.
CAC helps companies determine if they are getting their money’s worth in investments to increase their clientele. This can be anything from paying for leads, clicking banners, or investing in articles or graphic content. Today, internet marketing methods can now target specific groups of customers. Before, companies had to launch a wide network with advertising.
They had to target their marketing content to a wide segment of potential customers in the hope that it would attract some new customers. However, this approach lacks specificity and many companies saw insufficient returns on their marketing investments. Modern, targeted campaigns when combined with CAC, target specific groups of people.
It can also tell you how much you are spending to onboard a new prospect and turn them into a paying customer.
What does the CAC calculation involve?
There are a few things to consider when calculating the cost of customer acquisition.
- Advertising expenses
- Marketing team costs
- Sales team costs
- Creative costs
- Technical costs
- Publishing costs
- Production costs
- Inventory maintenance costs
How to calculate the CAC?
CAC is calculated by dividing the costs spent on acquiring customers by the number of customers acquired during the time the money was spent.
For example, a business that spends $ 1,000 on marketing in a year and gained 100 customers that same year, its CAC amounts to $ 1.
The customer acquisition cost formula is $ 1000 ÷ 1000 customers = $ 1 per customer.
If the business only gained 500 customers, then the CAC will be $ 2.
The formula for calculating the CAC is quite simple.
However, the sum of the total expenses takes into account many factors, including the cost of multiple marketing strategies and staff salaries.
Some companies may even make investments like marketing in a new region or early stage. SEO And don’t expect to see results from these until a later date.
This creates some problems when calculating the CAC.
Therefore, it is recommended that you make multiple variations to account for these situations.
Take a fictitious home services company that offers HVAC and plumbing services.
The company’s marketing efforts include:
- Paid sales and marketing staff
- Social media campaigns
- Pay per click campaign
- Magazine ads
The company decides to track how much it costs to acquire new customers for a year from January 1 to December 31. They will consider what they spent during the year and how many clients they have at the end of the year.
Here’s a breakdown of their customer acquisition cost formula.
- Paid Sales and Marketing Staff – $ 150,000 Total Spend
- Social media campaigns: $ 12,000 spent in total
- Pay-per-click campaign: $ 10,000 total spend
- Magazine Ads: $ 8,400 total spend
Total Marketing Expenses: $ 180,400
New customers acquired: 2,512
CAC $ 180,400 ÷ 2,512 = $ 71.82
Calculations show that the company spent an average of $ 71.82 for each new customer it acquired that year. This CAC is quite high for a home service business and should definitely be evaluated. You will want your CAC to be lower than the average selling price of your product or service to ensure that you are really making money from your efforts.
However, this is only the beginning of the CAC story. The business must also consider how much each customer spends, which can be calculated using the customer’s lifetime value (CLV).
Customer lifetime value and customer acquisition cost
Customer Lifetime Value (CLV) or Lifetime Value (LTV) is an estimate of the amount of money a business can generate from a customer over the “life” of the customer as its customer. You can also take into account the reasons why customers stay beyond your product. The CLV is determined by adding the income obtained from a client (annual income multiplied by the average useful life of the client) minus the initial cost of acquiring them.
You can also search for a CLV calculator using your favorite search engine. The CLV gives you a better understanding of what customer acquisition cost means to your business. However, the amount of time a person remains a customer and how much they spend will vary from company to company. This means that you will have to consider other factors that may affect your business specifically.
These are some of the most important elements of CLV for most organizations.
- Average Customer Lifespan – How long the individual remains a customer.
- Customer retention rate – The percentage of customers who buy back.
- Profit margin per customer: takes into account CAC and other expenses. These can include the total cost of goods sold (production and marketing costs), as well as how much it costs to run the business.
The profit margin per customer is calculated by taking your net income per customer (minus the CAC) and dividing that number by your customer revenue over your lifetime as your customer. Then multiply that number by 100 to get the percentage.
- The average amount that a person spends throughout their life as a customer: Add what each customer spends during their lifetime and divide by the number of customers.
- Average gross margin per customer – can be calculated for a specified period. For example, one year or based on the lifetime of a customer.
If you are doing a duration calculation, take the profit margin per customer during their lifetime and divide it by 100. Then multiply that by how much they spent during their lifetime.
Let’s take a look at a bogus company offering small business marketing services.
Here’s a look at the numbers for this company:
- CAC – $ 180 per customer.
- The average customer stays for 10 years.
- Your profit margin per customer is 19%.
- The average amount spent by each client during his life in the company: $ 57,052.
- Average gross margin per customer over their lifetime with the business – Calculated by 0.19 x $ 57,052 = $ 10,840.
How to improve the CAC
There are several methods you can use to improve your customer acquisition costs, these include:
Get to know CAC by marketing channel
Most marketers want to know the CAC for each of their marketing channels. If you know which channel has the lowest CAC, then you know where you can spend the most on marketing. The more you put into your marketing budget on the lower CAC channels, the more clients you can get for a fixed budget amount. The best approach you can take is to use your spreadsheet and collect all the marketing receipts for the year and add up those amounts by channel.
Improve conversion metrics on the site.
Set a goal in Google Analytics and perform A / B split testing with new payment systems. Do this to reduce your shopping cart abandonment rate, improve your landing page, your site speed, mobile optimization, and other factors that can improve your site’s overall performance.
Add value to your offer
The value that users perceive of your product and services is subjective. This is why it may not have the desired effect if you have implemented features similar to what other companies use. Take a different approach and try engaging with customers through surveys and emails that can help you figure out what is best for them. You can also study stats like customer retention rate and subjective feedback from any reviews you receive.
Use a CRM system
A CRM system helps you keep track of new customers, their movements through your sales funnel, how much they buy, loyalty programs, and more. It can also be used to manage email lists and campaigns such as promotions, seasonal email advertising, and drip campaigns.
What can CAC do for you?
Measuring and tracking CAC is important to your business. Businesses can use CAC to allocate resources and funds and strategize for their marketing campaigns. It can also help guide them through their hiring and salary process. CAC and CLV combine to create a powerful tool that can help you assess your return on investment (ROI) from marketing.