Customer Acquisition Cost (CAC)CAC, as the name suggests, is how much money you will need to spend before a lead finally purchases your product or service, or in short, converts into an actual customer. In the past, tracking this cost is fairly difficult, and in some cases, impossible. Yet, in this digital era with all the trackable campaigns and web-based advertising, CAC has grown to be one of the most important digital marketing metrics.
How CAC Will Affect Your BusinessCAC is a very useful metric to determine the profitability of your company, and so is often used by early-stage investors and incubators to analyze the scalability of a new company. For internal operations, and especially marketers, CAC is mainly used to optimize the ROI of advertising campaigns. When CAC can be reduced, it will translate into a bigger profit margin.
Measuring CACDetermining CAC is actually really simple:divide your total marketing expenses during a certain period with the number of customers acquired. So, for example, if your company spent $1,000 on advertising expenses in a year, and you acquire 500 customers that year, your CAC is $2. But, how about marketing expenses that are more long-term in nature, and won’t directly contribute to customer acquisition? You’re right, in these situations, for example if we have an early investment of SEO, the CAC calculation will be a little clouded. On the other hand, what if a certain customer bought your product or service more than once during that one year period? This will also disturb the ‘accuracy’ of your CAC. Well, digital marketing is indeed a complicated thing, and these situations are just a few examples of countless others. Thankfully, there are other metrics, that in conjunction with CAC will resolve these situations, and as we move forward in this guide, we will learn how.
How To Use CACIn general, our aim is to know the CAC for each of your marketing channels. This way, we will know which channels are effective in acquiring customers, and which are not. The main idea is: the more money you put on lower CAC channels, the more ‘effective’ your marketing progress is. There is no easy way to achieve this, as you will need to track all of your marketing bills in different channels. There are many different approaches in calculating CAC for individual marketing channels, but generally they will boil down to just three groups:
- The Average Approach: Here, you assume all channels contribute equally in acquiring customers. This thought roots on the belief that each channel supports the next: your ads support your blog posts, organic search support ads, etc.
- The Ideal Approach: Ideally, we should calculate CAC based on the channel’s direct contribution. This can be really difficult, but the latest technologies have helped us achieve this better. For example, conversion tracking pixels in PPC ads will let us know exactly how many customers we acquired.