As a marketing VP, you need to know what your Customer Acquisition Cost (CAC) is. If you are not aware of what your CAC is, you could be adding lots of new customers and assuming that everything is going great. But it doesn’t matter how many new customers you add if you are spending more to acquire new customers than those customers add in revenue. If you continue to do things that way, at some point the money is going to run out, even if there are hundreds of customers that love and use your product. That is probably why David Skok calls CAC a startup killer and believes it is the second biggest cause of startup failure. Neil Patel also believes CAC can destroy your business if you don’t work to prevent it.
That’s some heavy language. Fortunately, you can prevent destruction at the hands of a CAC that exceeds the revenue new customers add to your company by creating a positive CAC to get your revenue and company growing. To do this, you need to track your CAC and we’re going to teach you how to do it.
What is Customer Acquisition Cost?
Like mentioned earlier, tracking Customer Acquisition Cost helps you know how much it costs to acquire new customers in general. Having this basic knowledge is an important piece of knowing if your company is profitable or not. But you can’t really tell how your current CAC impacts the company without also knowing your Customer Lifetime Value (more on that in next week’s post). If you’re looking to attract investors, they will want to know your CAC.
TIP: For a simple CAC, divide your total marketing costs by the number of customers acquired. But to have an accurate general CAC you need to include more operating expenses in your CAC calculation. If you really want to dive into CAC calculation, check out Andrew Chen’s blog post.
Why is Customer Acquisition Cost Per Channel important?
To make marketing efforts even more effective, you need to know your Customer Acquisition Cost Per Channel (CACPC). CACPC shows which marketing channels are responsible for bringing in new customers and at what price, allowing you to optimize your customer acquisition strategy. Depending on the data you could increase spending on a high-performing channel, investigate why a specific channel is not performing well, or decide to stop spending on a low-performing channel altogether.
Setting up a CACPC metric as a column and line chart makes it easy to compare market spend for each channel, along with how successful each channel is at adding new customers.
If the metric above were built with data from your business, it’s obvious your cheapest acquisition channels are Facebook, Instagram and Adwords and your most expensive channels are Bing, LinkedIn, and Twitter. At that point, you can increase or decrease spending in a specific channel and investigate why one channel performs better than another.
The metric above shows all the acquisition data from each channel for a specific month but you can also view this data for the whole year.
Another option for viewing this data includes seeing it for the whole year broken down into each month by cohort as shown in the metric below. Displaying the data in this way helps you to tie acquisition results to specific campaigns. This could help you learn that a channel only converts well for specific campaign types. If you continue to use that campaign type, the channel would be a profitable way to add customers.
How do you calculate Customer Acquisition Cost Per Channel?
No matter how you choose to visualize your data, calculating CACPC has it’s challenges. There are two frequently used methods to calculate CACPC. The averages approach and the last touch attribution approach.
Calculating CACPC with the averages approach is basically the same as calculating your basic CAC. You take the total cost of acquiring customers and divide that by the number of channels used to gain customers. For obvious reasons, this approach is problematic when trying to see which channels perform best. For example, if you ran a brief LinkedIn campaign for a week and didn’t put much money into, it would get equal credit with an extensive email campaign run during that month.
The last touch attribution method, used to create each of the metrics above, is much better for optimizing your marketing spend. This method offers a better picture of how each channel performs individually. In the last touch attribution method, the last channel a customer touched before making a purchase is given credit for adding a new customer. For example, if a customer first saw an ad on LinkedIn, then read a blog post and downloaded an infographic, and finally made a purchase after seeing a Facebook ad, Facebook would receive the credit for the acquisition.
As you can see, this method is not perfect for showing each step of the buying phase. At other times a customer could first see something on Facebook and then convert because of an Adwords campaign giving Adwords the credit for the acquisition. So some balancing will occur to the numbers when using the last touch method.
To dig deeper into different channel attribution, look into multi-touch attribution which allows you to track different channel and campaign touches during a buyer’s journey to a purchase.
The metrics shown above were created in Grow with data pulled from Salesforce and the data from each of the channels being tracked. Grow can also create this metric with data pulled from CRMs like HubSpot, Zoho, Base, Nutshell, Pipedrive, and others which you can view here.
CAC and CACPC are important to know, but without also knowing your Customer Lifetime Value (LTV) you will not know if you have a positive or a negative CAC. We will dedicate a post next week to LTV to help you understand how to track and create an LTV metric.
TIP: There are several ways to calculate CAC including lifetime, per period, per campaign, etc. Each type offers different performance insights.