As marketers, we’re always interested in getting creative with new channels and tactics. In fact, one of the most common questions that come up when I talk to other marketers is, “How are you using ___?”
Whether the discussion is about tactics like ABM events, channels like TikTok, or tools like Drift, these brainstorms can result in a ton of great inspiration and sometimes even plays you can’t wait to incorporate into your next campaign.
However, it’s important to take all these exciting ideas with a grain of salt. Why? Because every company’s target audience is different — what works for one company may not work for yours, even if you’re in the same industry.
So, how do you find out which new strategies and plays are likely to make the biggest impact on your pipeline and revenue? Since you don’t have the budget to say yes to everything, this is where contextualizing your marketing return on investment (ROI) with your customer acquisition cost can prove to be a game changer.
Here’s what you need to know 👇
What Is Customer Acquisition Cost?
Customer acquisition cost (CAC) is a metric that estimates the amount of money a business spends to acquire one new customer. Knowing their CAC, a business can gauge how effective their go-to-market (GTM) initiatives are at converting to customers.
Once you’ve figured out your CAC, the goal is to get that number as low as possible. By doing this, you ensure you’re spending less money than you make overall, which results in a positive ROI.
Today’s marketers aren’t afraid to dive deep into the metrics. But while most people would agree that measuring marketing performance is crucial, many struggle to do so successfully.
According to Salesforce’s Marketing Intelligence Report, marketers state that ROI and customer acquisition are two of the top three metrics that define marketing success. That said, less than a third of marketers (31%) say they are truly successful in evaluating either of those metrics. This means that, when it comes to proving the success of your marketing initiatives, there’s still plenty of room to grow.
CAC is one of the best ways to demonstrate your team’s impact on the bottom line through your marketing ROI. By calculating your CAC, you can zero in on the channels and campaigns that are bringing in new customers, instead of just open opportunities. And, by measuring your CAC on a regular basis, you’ll be able to know exactly which activities are contributing to revenue.
Just remember: Good marketers talk about how many leads they’ve generated, but great marketers talk about how many customers they’ve acquired. By focusing on CAC, you can ensure that you’ll be the latter.
How to Calculate Customer Acquisition Cost
The simplest way to calculate your CAC is to divide your total marketing and sales costs for a given time period by the number of customers you acquired in the same time.
CAC = Total Marketing & Sales Spend / # of New Customers
Here are some points to keep in mind when defining these variables.
- Marketing and sales spend: This should reflect the total cost of all activities taken across your organization to acquire new customers. You’ll need to include any paid programs, like advertising or event sponsorships, as well as more fixed costs, like the cost of your tech stack or your sales incentives.
- Customers: Focus on net new customers only — filter out existing customers, renewals, and expansions.
- Time: Figure out the average amount of time it takes to acquire a customer, then decide your time period from there. If you calculate your CAC monthly, for example, but it takes two months for customers to actually buy your product or service, the equation won’t work.
For your business to be profitable, your CAC needs to be less than how much your average customer spends with you. (Easier said than done!)
Customer Acquisition Cost Examples
What does the CAC equation look like in practice — and what does the calculation tell us? Well, consider these scenarios:
Example #1
Let’s consider a fictional software company that specializes in email marketing automation. In the past quarter, this company spent $20,000 on marketing (such as display ads, online events, and content offers) and $30,000 on their sales efforts.
During this time, they acquired 500 new customers. As a result, their CAC calculation would be:
($20,000 + $30,000) / 500 = $100
So, in this quarter, the cost of acquiring one customer for this company was $100.
Example #2
Now, let’s consider a different type of company — one that offers an organic food subscription service. Over the course of a quarter, they spent $2,000 on a social media marketing campaign and $10,000 for their team, tech stack, and website.
This company acquired 250 new customers, so their CAC calculation came out to:
($2,000 + $10,000) / 250 = $48
So, in this time span, the cost of acquiring one customer for this company was $48.
👆 What do these two scenarios tell us? At face value, you could say that the second company is getting more value out of their marketing and sales efforts because their CAC is lower.
But these examples show that, while CAC does help you gauge the amount of money you have to spend to acquire a customer, it doesn’t take into account the value that each customer brings in. A marketing automation software is likely going to cost more than a food subscription service — which is why looking at CAC alone won’t be enough.
Comparing Customer Acquisition Cost to Customer Lifetime Value
Customer acquisition cost shows the minimum value that a first-time customer needs to bring into your business in order to make it profitable.
But, in order to accurately gauge the value that your customers will bring in, you need to look at a second metric: customer lifetime value (CLV). Customer lifetime value is the amount of money your organization can expect to receive from a customer throughout their entire relationship with you — from their first purchase to any expansion or upgrades.
CLV = Customer Value x Average Customer Lifespan
By comparing the ratio of your CLV to your CAC, you can get a better idea of how successful your marketing and sales campaigns are. Because while CAC provides insight into your efforts today, it’s your CLV that will help you focus on the value you will receive in the future.
Because, when we talk about lowering your acquisition costs, what we’re really talking about is efficiency.
If you focus too much on your CAC, you’ll find yourself spinning your wheels on customers that may churn in the next month. Similarly, you can easily overlook channels that are essential for building trust and authority that don’t fit neatly into your CAC calculations, like creating thought leadership content. Measuring customer lifetime value alongside your acquisition costs helps balance out your efforts so that, if you do spend more to acquire a customer, you know they’re going to stick.
Paying attention to CLV — and building a phenomenal customer experience — is a long game. But when you have happy and successful customers that love working with you, it kicks off a self-feeding word-of-mouth engine that builds your brand and drives down acquisition costs.
How To Reduce Customer Acquisition Cost
The most effective way to reduce your customer acquisition cost isn’t a tactic. It’s a change in mindset. And that’s making sure your marketing team is just as comfortable talking about ROI as they are about brand or customer experience.
For me, that means having weekly team meetings where I’ll have a visual dashboard that shows pipeline, revenue, and channel performance. There, my goal is to get my team talking about pipeline generation and acquisition costs so that we can work together to determine what’s working (so we can double down) and what’s not (so we can fix it or cut our losses) in a data-driven way.
To successfully decrease your CAC, your entire marketing team must align around it as a goal— whether they’re in a more traditionally data-centric role, like operations or demand generation, or a more brand-focused role, like content and community.
That said, there are a few tactics you can use to reduce your customer acquisition costs:
- Focus on inbound: While it’s easier to quantify the amount you spend on advertising or participating in a trade show as well as the leads that come out of it, outbound marketing runs on the more expensive side. But inbound channels are low (if not zero) cost. For example, investing in a SEO strategy with your content team can massively boost your website traffic without having to pay per click.
- Be consistent: Brand-building never goes out of style, but that’s especially true on social media. Don’t start obsessing about “going viral” though — instead focus on where your audience is and what they care about. The more you can show up and deliver reputable, helpful content they want to engage with, the more you’ll build up trust and drive purchases. That means you shouldn’t jump on every meme or trend, but that you should pick a style and be consistent.
- Optimize your website: The more you can fuel demand from channels you own, the less you’ll have to spend on advertising or other paid channels. Take time to understand how a typical conversion works on your website through heat mapping and web analytics and see where you can create nudges towards a purchase. And to get the most out of your social media and ad campaigns, make sure your landing page is primed for conversion and matches the messages you’re putting out. Plus, a well-placed chatbot can help streamline your visitor’s web journey, driving more conversions while improving the efficiency of your marketing and sales efforts.
Reduce Your CAC with Drift
Just because you’re reducing your customer acquisition costs doesn’t mean you need to slash your paid programs or stop attending trade shows. However, it does mean focusing more of your time and effort around engaging and converting buyers through inbound channels.
That’s where Drift can help.
Drift Conversational Marketing empowers you to scale real-time, personalized conversations on your website 24/7/365, so you can meet your buyers’ needs, nurture them with the right content, and instantly connect them to sales when they’re ready. Get a demo today.
