Ask any business owner or manager and she'll tell you that knowing how much you spend to acquire new customers (customer acquisition cost) is an important metric to watch.
Customer acquisition cost is a metric used to determine the average cost spent to acquire a new customer.
And calculating it is pretty straight forward. No math degree required.
Start by taking your total sales and marketing spend for a specific time period and divide it by the number of new customers for the same period.
Your sales and marketing costs are any department related expense such as advertising, salaries, commissions, fees, bonuses, contests and additional overhead.
Because customer acquisition costs (CAC) illustrates spending per new customer acquired, an increase in customer acquisition costs will usually mean one of two things:
- You're spending more money but generating the same number of new customers on average (over a specific time period).
- You're spending the same amount of money but you aren't acquiring as many new customers on average (for the same time period).
Either way, customers are getting more expensive.
Both of the above scenarios highlight two problems that have become top priority.
The first problem is a result of increasing sales and marketing spend, you're expecting/planning for the volume in leads being generated and worked to increase to lead to more customers, but it doesn't.
If increased spending doesn't increase new customer acquisition, then it's time to peel back the union. This is telling you that there is a bottleneck somewhere in the marketing funnel and the return on investment isn't looking good.
Start by finding the bottleneck. Beginning at the top-of-the-funnel, with source traffic, move down the funnel. If traffic has increased but leads have stayed the same, you may have a problem converting website visitors to subscribers/leads.
But if traffic is up, leads generated and leads worked are all up, then it may be a product-market fit problem because if you are generating more leads and they are covering into customers they may be the wrong people.
The second problem is sometimes a little harder to notice right away. Because you aren't increasing monthly sales and marketing spend, instead the marketing funnel becomes less effective and starts to produce shrinking results.
Lets look at one example with the follow criteria:
- 65% of our traffic is from organic
- 45% of traffic is from paid sources
- Visits to new contact rate is 2%
- number of contacts that convert into qualified leads is 10%
With this scenario, we can see that adding one salesperson a month to support growth, and maintaining a marketing team of 3 people results in a 40% decline in our customer acquisition cost.
Now, lets see what happens when we increase our marketing budget on paid advertising making up 60% of our traffic now.
Over the course of the year we can see that because we are continually paying for visitors versus concentrating on building compounding content, our customer acquisition cost only drops 38%.
Lets see what happens to our CAC if we increase our visitor to contact rate from 25 to 4% halfway through the year.
Now you can see we are almost at a CAC of only $4k. which is 52% below our starting point.
Looking at the split between investment you can see that as marketing becomes more efficient the costs start to flatten out.
Is my marketing efficient?
Customer acquisition cost is great as an alarm for inefficiencies and over spending.
If you have taken the time to align your sales and marketing then you should have a clear line that leads cross between marketing and sales.
A lot of digital marketers are drawing this line with marketing qualified leads. A lead that marketing has qualified enough to pass it along to sales is marked a marketing qualified lead.
Now we have a clear point of transition.
Working backwards from new customers to determine where our customer acquisition cost increases are coming from, we'll eventually move from sales to marketing.
If you get to marketing you know that there is an inefficiency with marketing and not sales.
Now that you know that marketing is responsible for CAC increasing, determine which our marketing operations are not as efficient as they could be.
My marketing is inefficient, what do i do?
Your next steps are going to be different depending on where the bottleneck is in your funnel.
Where are you the most inefficient? Do you get a decent amount of traffic that never converts into a new contact?
Or maybe you convert a lot of contacts that disappear and never return to your site.
Both of these scenarios are common but require different investments.
The first scenario requires figuring out why people aren't converting or subscribing to your blog.
Determining where you traffic is coming from, what they are looking for and what they aren't getting will help you to add value and convert more contacts.
If you're converting contacts that don't remain engaged then you want to focus on relationship building, lead nurturing and a more personalized and professional follow up to interactions.
These are just a few examples of how to address marketing inefficiencies.
Your customer acquisition cost can tell you a lot about how your business is operating, specifically, how good you are at acquiring new customers at a lower rate over time.
Because both marketing and sales functions are responsible for acquiring a new customer and because new customers are needed for growth, this one metric can give you deep insight into how things are moving along.
Next time we will cover the relationship between your acquisition costs and revenue, and customer lifetime value.
For now, please feel free download our cheat sheet around the most important inbound marketing metrics you boss actually cares about.