Blog / InspirationSaturday, June 13, 2020

Guide | The what, how and why of customer acquisition cost

Anne Egdal

Guide | The what, how and why of customer acquisition cost

Thanks to continuing improvements in customer behaviour tracking, it has never been easier for businesses to measure their customer acquisition cost (CAC).

The ability to measure CAC has had a substantial influence on businesses, especially in the SaaS space. 

Businesses who know what their CAC is across different marketing channels can make better decisions. These businesses can choose where to focus their marketing efforts, which channels they might withdraw from, and optimize whatever campaigns they are running.

CAC is an important metric for many stakeholders involved in a business. At the top level, executives and investors want to know about CAC for projecting revenue, profit, and future investment. Companies can also feed it into and use it alongside metrics like customer lifetime value (CLTV). At the middle management level, CAC is an excellent indicator for marketing and sales managers and their teams on the effectiveness of their work.

How to Measure Customer Acquisition Cost

CAC itself is simple enough to explain. It’s what you spend to get one customer to sign up.

It is most common to use CAC as a metric for new customers only or on a per-transaction basis. If a customer subscribes to your SaaS platform, unsubscribes, then re-subscribes, you would measure the CAC and count that customer twice.

CAC formula

We’ve included a working example for calculating your monthly CAC below:

CAC = $2,500 marketing spend + $5,000 sales spend / 200 New Customers

CAC = $7,500 / 200

CAC = $37.5 per customer

Many analytics tools provide in-depth detail and individual level tracking, which means some businesses can theoretically track CAC at a personal level. However, it is still most common, and useful, for companies to measure it as an overarching metric.

It’s Important to Measure Customer Acquisition Cost on an Ongoing Basis

If possible, you should measure this on a rolling basis. However, as a minimum, you should look to measure CAC monthly, but have a cumulative figure for each quarter as well as the entire year. You can also measure individual quarters and years on their own, so you have a full record of your CAC performance. Keep records so that you can compare like for like in the long term. Remember to keep records of specific marketing campaigns and what you were doing during each period.

Measuring Customer Acquisition Cost Across Different Marketing & Sales Channels

The ability to break down CAC across different channels is something for which all businesses strive. Even with the best tracking setup available, measuring CAC will never be an exact science. You'll always have customers who have several touchpoints with your brand online who then sign up on the phone if it’s possible to do so.

A useful way to go about working out your CAC is first to calculate spend across all marketing channels. You can do this easily with an Excel spreadsheet. You might end up with a table that looks a little like the example below. Let's say this is for one month.

Organic Marketing

Google PPC

Facebook Ads

Affiliate Marketing

Email Marketing

Direct

TOTAL

$2,000

$2,500

$1,000

$500

$200

$1,500

$7,700

In our example, direct spend is for anything you do offline that you want to drive direct visitors to your website. If you do no offline advertising, you can theoretically have a CAC for the direct channel of $0.

At this stage, you will need to decide how you want to measure and value each channel. There are several attribution models that you might use. None are right or wrong. It’s about what works for your business.

To allow us to continue with our example, let’s say you decide to use last-click attribution.

Add the number of customer signups per channel to another row in your table. Divide these to get your CPC per channel.

Organic Marketing

Google PPC

Facebook Ads

Affiliate Marketing

Email Marketing

Direct

TOTAL

$2,000

$2,500

$1,000

$500

$200

$1,500

$7,700

57 sign ups

10 sign ups

2 sign ups

1 sign up

4 sign ups

26 sign ups

100

$35.09 CAC

$250 CAC

$500 CAC

$500 CAC

$50 CAC

$57.69 CAC

$77 CAC

 

From this table, we can see our overall CAC, and how each channel performs on its own, and against the overall performance.

However, this doesn’t paint the whole picture.

If you saw the figures above, you might turn off Facebook, affiliate marketing activity, and start to look closely at your Google Ads account.

To get a full appreciation of these figures, you need to calculate your CLTV by channel, too. You might find that while Facebook marketing has a higher CAC, also it delivers a much better CLTV.

Remember, it isn't an exact science, but the more you can do to measure your CAC and CLTV, the better decisions you will be able to make.

How to Improve Customer Acquisition Cost in Your SaaS Business

Every business wants to reduce their CAC. Even if customers do not stay subscribed for longer, a better CAC will improve your CLTV as you will be achieving a better profit margin.

There are several ways you can improve your CAC.

Review Your Sales Processes

Does your sales process back up the work you do on marketing? Whether you close transactions on your website, on the phone if you offer customized subscriptions, or both, not being able to do so successfully can drive up your CAC.

Make sure your sales efforts match the investment you make into your marketing.

Improve Your Conversion Rate

If you convert and signup most of your subscribers online, improving your website conversion rate could make a massive difference to your CAC. The beauty of conversion rate optimization is that it can be an ongoing thing. You can always have A/B tests running on landing pages and on your checkout process, for example.

Enhance Your Value Metrics to Offer More to Customers

Every time a customer enters your sales funnel and doesn’t convert, you have an opportunity to ask why and improve something.

If you’re looking to grow your SaaS business, you will already have an ongoing development program that seeks to enhance and add to your product.

In addition to having your own plans, you should ensure you ask your customers and those who don’t convert what more they would like to see. What is going to keep your existing customers subscribed? What will make customers stay in your sales funnel and sign up?

Use Customer Relationship Management Tools Effectively

Utilizing customer relationship management (CRM) tools at the earliest stage possible can help you to nurture leads and increase the number of leads that convert and become customers.

How you use a CRM platform is up to you. A great approach is to have an integrated system that involves both human-driven actions and automation. You can combine automated features. These might include the emailing of blogs, newsletters, and incentives based on time or where customers are in your sales funnel with personal actions such as calls, webinars, or live demonstrations.

Build a Sales Funnel with Repeatable Use Elements

The best sales funnel is one you can use repeatedly.

The best resource you have is your website, and it goes beyond merely keeping it optimized. Think about things like your blog, and how you can use this to attract customers into your sales funnel. You can give away stuff like user guides or provide eBooks and other resources in return for people signing up for your email newsletter.

Longer-term, this can bring down your CAC. If you publish a set of exceptional guides on your blog, they could drive traffic to your site for years and introduce new customers to your service. The best aspect of this? You only paid to write the blogs once, with minimal ongoing maintenance after that.

Using CAC to Grow Your SaaS Business

By focusing on improving your CAC metric, you won't just find that you get customers quicker and at a lower cost. You'll have an impact across your whole business.

Put the ideas and your learning from this article into practice and ensure you give CAC the attention and thought it deserves.

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