Customer Acquisition Cost: The Holy Grail Metric

By Miriam Kung | 21 Aug 2019
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Though marketing trends, channels, and tactics have evolved over the years, one marketing metric that's remained constant as the holy grail of measurement is your Customer Acquisition Cost (CAC).

But wait a second, isn't your ROI the holy grail of marketing? It is as well 😉 but you can't calculate your ROI without knowing your customer acquisition cost (more on this below!).

Knowing your Customer Acquisition Cost, in addition to other key metrics like your revenue and customer lifetime value, is the foundation to determining your ROI and where to invest your budgets. And if you're any type of business, you'll know that in the end, what matters is bringing in customers with a positive ROI on your efforts.

We'll dive in and guide you through everything you need to know about Customer Acquisition Costs, including:

  • 💰 What is Customer Acquisition Cost (CAC)
  • 🔢 How to calculate your CAC
  • 📈 When to use your CAC data
  • 💥 Ways to improve your CAC

But before that - if you want to skip ahead of the learning curve, marketing jargon, and formulas below and still be a CAC whiz, we’ve got your covered 🙌. Trying our new Smart Attribution tool will give you clear data you're looking for about your CAC and revenue, and reveal ROI for any channel from day 1 🔥.

What Is Customer Acquisition Cost?

Customer acquisition cost (CAC) is the amount you spend to acquire each new customer.

The costs can vary widely based on the types of channels and programs you're running (e.g. online ads or event marketing). To most accurately calculate your costs across programs, it's a good idea to include every expense involved in generating new customers, such as all marketing & sales costs, salaries, and any overhead or outsourcing costs.

For a sustainable and profitable business, you'll want to ensure your CAC is lower than your customer lifetime value.

Customer lifetime value (LTV) determines how much profit each customer brings in over the entire duration of their relationship with your business.

This is why it's so crucial to know how much you're spending per customer - in other words, ensure the dollars you're bringing in are greater than the dollars that are going out 💰.

And with both CAC and LTV, you'll be able to calculate your Return on Investment (ROI).

How To Calculate Your CAC

The basic formula to determine your Customer Acquisition Costs over a period of time is:

Customer Acquisition Costs = Total costs / Total number of customers acquired

For example, let's say we want to calculate our B2B SaaS company's CAC for our Facebook Ads channel, using the following data points:

  • Time period: July 1 to July 31
  • Spent $4500 on our Facebook Ads budget
  • Spent $500 on video ad design software
  • Acquired 50 new paying customers

In this scenario, we'd sum the total expenses (Facebook Ads spend and video design costs) and divide that by the total number of new paying customers over the month.

CAC = ($4500 + $500) / 50

So the CAC would be $100 per paying customer for the month of July.

Once you have your CAC, you'll then want to calculate your LTV (or revenue) to compare how much profit each customer brings in over their lifespan.

This will ultimately let you measure your ROI, which in its simplest formula is calculated by:

ROI = LTV - CAC / CAC

Continuing with our SaaS example, let's say our LTV is $1000. Our ROI from Facebook Ads would then be:

ROI = ($1000 - $100) / $100

Which means we see a 900% or 9x ROI, which is a pretty solid return on investment!

As you can see, the lower your CAC, the higher your profit margins are, and in turn the higher your ROI 🚀. For SaaS high growth businesses, an LTV:CAC ratio of 3:1 is the industry benchmark and standard to aim for.

How To Leverage Your Customer Acquisition Cost Data

Putting this altogether, how can you use your CAC data to grow your business?

The simplest method many marketers resort to, is using spreadsheets to manually aggregate data and compare CAC, revenue, LTV, and ROI across channels. We found ourselves in the same painful weekly exercise pickle as our customers, in copy-pasting ads spend, conversions, and more from every ads channel (as none of them have the same template) into a Google Sheets template 🙈.

On top of all that time wasted, all our efforts still only showed a narrow slice of our data pie 🥧 - it never gave us the full picture of how visitors moved between channels before converting. And this is key to understanding the part each channel plays in your customer funnel.

So we introduced Smart Attribution, the first Customer Attribution solution that unifies your marketing efforts.

It gives a bird's eye analytics view, so you can better orchestrate your efforts and only invest in the most profitable channels. Here's a video on how to get setup:

Steps to get setup (sign up for a free account here!):

  • 💻 1. Install the conversion tracking script: A snippet of code you can add to your webpages, to track traffic across your site and key conversion events, such as signup and purchase.
  • 🔗 2. UTM tracking: Attribution is done via UTM tags, which you can add to all your marketing links. Then, easily segment your attribution data by UTMs in your dashboard.
  • 🛠 3. Integrations: Connect your CAC, revenue and more data across ads (Facebook & Google), E-commerce platforms (Shopify), CRMs (coming soon), and more in a few clicks.

💥 Pro tips:

  • If you use multiple ads platforms (e.g. Facebook and Google), compare your CAC and ROI between each platform to see your top channels & campaigns.
  • Toggle between different attribution models to see how customers discover your business (first touch attribution), all the touchpoints in between a customer's path to conversion (multi-touch attribution), and the final channels customers tend to visit right before converting (last touch attribution).

How To Improve Your Customer Acquisition Cost

When it comes to reducing your CAC across your marketing efforts, there are a variety of tactics you can implement, based on your channels and the purchase flow.

As a general rule of thumb, ensure you analyze, test, and optimize every part of your acquisition flow and customer lifecycle. Below are 4 tips to cover a broad range of categories:

📊 1. Measure ROI with marketing attribution

  • As a foundational step, using marketing attribution is key for monitoring your CAC and ROI across any paid or organic channel, and getting clear insights into which ones convert best.
  • Tools to use: Smart Attribution

💻 2. Optimize website conversion rates

  • Monitor your visitor-to-conversion rates, and ensure your website is simple to understand, easy for people to signup, and mobile-optimized. It's a good idea to test different copy, CTA buttons, and designs.
  • Tools to use: HotJar lets you track visitors with heatmaps. We're a big fan of FullStory, which shows you video snippets of how people use your product and where they struggle. You can also make it easy for prospects to get in touch with you and convert more quickly with customer chat solutions like Intercom and Drift.

👯‍♀️ 3. Upsell existing customers

  • One of the best ways for unlocking more customer happiness and LTV, is by upselling customers with features they need. For many SaaS businesses, 90% of revenue comes from upselling and on the E-commerce end, Amazon sees 35% of sales come from upselling. We've found it's most helpful to hear pain points from customers directly, then build solutions (that's how we birthed Smart Attribution and AdInbox.Me 😉) .
  • Tools to use: Intercom and Drift are great ways to notify and onboard new or existing customers and promote new features. You can also use form building tools like JotForm and Typeform to get scaled insights from customers before building a new product.

♻️ 4. Shorten sales cycles

  • Creating customer lifecycle campaigns is key for engaging, converting, and retaining customers. Using a CRM platform lets you track all your leads and customers and keep sales cycles short. A marketing automation solution also lets you setup email campaigns, nurture leads and customers, and upsell them.
  • Tools to use: Our SMB customers prefer CRM tools like HubSpot, and then migrate to Salesforce once they've grown. We use Mailchimp for email marketing, and many customers also use Marketo for a full marketing automation platform.

Now that you're a CAC pro 😉, as a final tip, remember that your customers, costs and business will likely constantly evolve.

So to get reliable CAC, ROI and more insights at your disposal that you can drill into at any point - save time and unlock more growth with customer attribution solutions like Smart Attribution.

Want to automatically calculate your CAC and ROI across channels? Sign up for a free PixelMe trial 🎉. If you have any questions, just message us from the blue chat icon in the bottom-right corner! 💬

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