There seems to be a growing trend for businesses, often marketers, to rely on customer acquisition cost as a metric or KPI (key performance indicator). It seems to be used more and more in today’s SaaS (software as a service) heavy environment where tracking all costs around acquiring a customer are becoming more transparent and easier to access.
Basically, customer acquisition cost (CAC) refers to all the costs associated with bringing in anew customer. From a marketing standpoint, using CAC really helps you nail down your return on marketing spend or your ROI.
It’s a fairly easy calculation to make where all your cost inputs are summed and divided by the number of new customers. If you were running ads on Google AdWords one of those costs would be the amount you spend on all the clicks you’ve received, regardless of if they ended up filling out the form and eventually become a customer. For example, if you spent $1000 on getting clicks/traffic to your site, and 5 of those people ended up becoming customers, your CAC would be $200.
Now, there are definitely other cost inputs that you should be aware of. These could be the cost of the: employee, your website that hosts your landing pages, and the email tool that nurtures those customers to convert to a customer. When you layer that on, perhaps your total cost now become $1500 and your CAC would rise to $300.
Where this gets tricky is that very rarely is one channel solely responsible for acquiring that customer. Your inbound traffic, the conference and events you attend, and your emails could all play a role in moving someone from prospect to customer. You can break each of these channels out and understand their individual CAC but some areas like email might have a super low CAC as the cost inputs are low vs paid advertising which has much higher costs. But if you didn’t run those paid ads, then you wouldn’t have anyone to email so it can quickly become a tough number to nail down.
It’s at this point that marketing and CAC becomes more of an art than a science, although some experts like Klipfolio say you should aim for a 3:1 ration of customer lifetime value (LTV) to CAC. At the end of the day, CAC is an important metric to know and can help you grow at a much quicker and efficient rate.