Use and reduce customer acquisition costs (CAC)
Customer acquisition costs (CAC) is the average amount of money you spend to attract a single customer.
You calculate CAC by dividing the customer acquisition costs by the number of acquired customers. So, if you were to get ten new customers from a $ 1,000 marketing and sales spend over a period of time, the formula is: CAC = 1000/10 = $ 100.
This is an important marketing metric, and it's especially useful when you relate it to the value of your customer lifetime (aka LTV or CLV). However, as with most things in data analysis, there are a few pitfalls to be aware of.
In this article, you will learn how to:
CAC is an averaged metric. It does not take into account how different your customer segments are in value. This is important because you should be willing to spend more to get the most valuable customers.
However, there are two ways to properly leverage customer acquisition costs.
1. Use CAC in relation to LTV
CAC is an excellent marketing performance indicator when measured along with LTV. That's because LTV is another averaged "money metric".
The industry consensus on an ideal LTV::CAC The ratio for SaaS companies seems to be between 3: 1 and 4: 1. So if yours LTV is $ 350 and yours CAC is $ 100. You are right in the middle of these relationships.
However, because business models differ, try doing the numbers yourself to see how your other business costs and margins fit into such a relationship. The range from 3: 1 to 4: 1 seems rather arbitrary as I haven't found any data or case studies to back it up.
To illustrate how business costs can affect things, I've created a few hypothetical scenarios:
* The other monthly costs also include fixed business costs CAC like staff and infrastructure. By including these you can get net LTV and the breakpoint in months if you cover CAC and start making a profit.
Judging by the numbers alone, all of these business models seem to make sense, although the LTV::CAC The ratios for two of them are off-benchmark from 3: 1 to 4: 1. Regardless of these numbers, however, we need to look at the effectiveness of marketing spending to make rational decisions based on these factors CAC.
Why? Because you are reducing yours CAC and being more effective in marketing doesn't have to go hand in hand.
If CAC is too low, you limit your exposure to and spending on your marketing activities. This may look great on paper in the short term, but in the long run you would be missing out on significant growth opportunities.
CAC can also grow much faster in percentage terms than yours LTV while you stay more profitable. $ 10 CAC on 100 dollars LTV is technically worse than $ 70 CAC to $ 170 LTV. The difference to cover your other costs and margins is $ 90 versus $ 100 in the second scenario.
Finally, lower yours CAC shouldn't always be your goal. You have to take yours LTV, Customer base growth and overall marketing effectiveness are taken into account when considering adjusting your data CAC.
2. Use CAC isolated for performance advertising channels
As tempting as it may be, don't try to segment yours CAC for all of your marketing channels. It only works for your performance channels like PPC.
There are two reasons. I've already talked about the first one. Here is the second:
CAC locks you in for short-term decisions if you link them to separate marketing channels. For example measure CAC for display campaigns makes no sense. This is because these ads tend to appear early in the customer journey when most users are unwilling or unaware of them to buy your product.
On the flip side, in terms of performance channels, Google Ads even has one CAC installed equivalent. It's called "cost per conversion":
We can use this channel-specific cost per conversion to optimize the performance of that channel.
But you may think that it is not reflective CAC in its entirety. True, it only covers the cost of the last step in the customer journey. However, this is the best we can do here as you cannot attribute the cost of other channels to it.
The assignment assigns credits to marketing channels that contributed to the conversion. Imagine a soccer player who scores a goal after receiving a pass from three other players and another teammate clearing the way. Everyone helped to score the goal. But most companies can't do it that way in marketing.
Standard Google Analytics reports work with a flawed "Last-Non-Direct-Click" attribution model. It's like giving 100% credit to the player who scored the goal. This player could be an analogy to performance marketing channels as they often take full credit. I'll read a bit more about the write-up in the CAC Problems section.
Bottom line: if your trying to keep this in mind CAC All of your channels have attribution issues and you wouldn't consider other more branded channels.
I hope it becomes clear that you should always strive for maximum effectiveness, which doesn't necessarily mean reducing yours CAC. However, there is no doubt that you should balance your paid advertising with cheaper, and often more sustainable, marketing channels and tactics.
Here are some ways to reduce your inherent limits CAC::
With SEO and content marketing
Organic search is the main driver of traffic and conversion for many businesses, including ours:
The beauty of SEO is that it's an appropriate channel for all stages of the marketing funnel – from awareness to retention. People are always searching on Google.
So not only SEO You can grow your business on your own, but it also helps massively your other channels – like Paid Search Ads. This is because you are usually bidding on keywords closer to the conversion phase. However, a solid content marketing strategy includes content throughout the customer journey.
In other words, the combination of great SEO and PPC ensures that your brand is present throughout the entire customer journey. People are less likely to convert unless they know about you when they're ready to buy.
For example our article “What is HTTPS? All You Need To Know “does not focus on a topic that people usually look for when they are ready to enroll on a topic SEO Toolset. However, it is relevant "top-of-the-funnel" content as some of the searchers have websites and may want to look into it SEO in the future.
Promoting such an article through search ads would be a questionable expense at best.
But thanks to SEOThis article gets nearly 30,000 clicks from organic search every month. That would cost us over $ 12,000 if we paid for traffic in Google Ads:
It doesn't even take into account that you wouldn't get that many clicks from Google Ads anyway. This is because most of the users skip the ads and only click on organic search results.
Of course, for keywords closer to the conversion stage, often you want your website to show up in both paid and organic search results. Ranking high in organic search results for competitive keywords can result in "free" traffic that could otherwise cost hundreds of thousands of dollars from Google Ads:
With conversion rate optimization (CRO)
CRO is the process of customizing your website or app to convert a higher percentage of visitors.
If you don't optimize your website or app for conversions, it's extremely inefficient – even if it attracts tons of visitors. CRO is arguably one of the most efficient ways to make more money and reduce your initial cost.
Let's say you bring 100,000 users to your website every month. 5% sign up for your free trial, of which 15% will switch to your subscription of $ 100 per month. Your monthly marketing spend is $ 100,000.
Here's how increasing your conversion rates will affect revenue and revenue CAC in this simplified case:
If you increase your conversion rates by 30%, your CAC decreases by 41% and your sales increase by 69%. And you haven't done anything to get more people to your website. You have just worked with what you already had.
CRO is a whole marketing field that is quite complex. You need to know UX, Copywriting, behavioral economics, user testing, analysis and statistics.
You can try to learn CRO Yourselves as this is useful in all marketing. But invest in a CRO Specialist is probably one of the fastest, most effective returns on marketing spend you can get.
What you see under Goal or Ecommerce Conversion Rates in the standard Google Analytics reports is based on the number of sessions, not the users. Keep this in mind when looking at user-level conversions like logins or payments. You can create a custom conversion rate metric based on users.
Strike a solid balance between performance marketing and branding
While you can't really attribute branding activities to conversion activity, it does play a crucial role in converting visitors into customers. But that doesn't happen overnight.
If you are lagging behind with building brands, it actually increases yours CAC short term (~ 1 year), as these activities have no direct impact on your sales. But it will pay off very well in the long run, including a lower one CAC.
As a rule of thumb, the ideal balance between marketing spend on sales growth and brand building is around 40:60. This is one of the most important marketing concepts.
There is a lot of research going on in this area. The key to success is that branding is proven to be the main driver of long-term growth and success.
What are the problems with CAC?
I already mentioned that CAC is an averaged metric with attribution problems. Let me elaborate on that before I get into two other smaller topics.
Allocation problems when getting more detailed data
The most useful segmentation to work with CAC would be with your customer segments. For example, if you look at our pricing model, we are ready to spend multiples of our average CAC to acquire customers for the agency plan:
However, it is next to impossible to get reliable data knowing that you printed X for segment A or Y for segment B, which would be needed for this calculation. Most of your marketing channels target multiple segments.
There are possible solutions for creating more reliable attribution models, but these typically require tons of data and resources to create a custom data ecosystem. And even this cannot solve some attribution problems B2B Companies targeting corporate segments are facing.
Because of this, I would suggest that most people stick to simple things CAC Formulas.
Taking into account your business cycle
It's intuitive to divide your monthly marketing and sales spend by the number of new customers you received that month. I have also used this in the examples here. However, this can only work if your spending is constant month after month.
The problem lies in your business cycle. If you consider new users in March, a significant chunk of them will convert in February or even earlier thanks to your marketing efforts.
Of course, it's impossible to trace everything back, but you should know how many days, on average, it will take your visitors to convert from their first visit. If you have a 14 day trial, the average business cycle is likely to be between 2 and 4 weeks. Count with months for corporate customers.
So if you want to calculate the cost of customers won in March and your average. The business cycle is four weeks. Instead, use your February marketing spend in the formula.
It's more useful for established businesses
If hardly anyone in your market knows about you, it's not easy to keep them CAC within a reasonable range. Getting your first customers on board is a challenge.
Because of this, I would recommend that you start using it CAC if you already have at least one marketing channel that is constantly attracting new customers.
As with all marketing metrics, you shouldn't be obsessed CAC. It's an important metric, but you should already know why this might not be the most appropriate marketing KPI. When analyzing, keep the pitfalls and all other aspects in mind CAC.
Do you have any others CAC Insights? Would you like to ask about this metric? Ping me on Twitter.