For many brands, the focus is on growth, and an effective acquisition strategy will be central to your success in delivering on that.
However, acquisition can be an expensive business and growing at any cost isn’t a sustainable strategy for any business. So, the acid test for marketers always going to be how cost-effectively you are bringing leads into the funnel and how efficiently you are converting them into paying customers – which is where CAC and CPA come in.
Having a good understanding of what the metrics are and the role they play is key to being able to manage the cost of customer acquisition.
Here we consider:
- What Customer Acquisition Cost (CAC) is
- How to calculate it
- CAC vs CPA
- 3 tips for reducing customer acquisition costs
- Optimising your customer acquisition spend with Corvidae
What is Customer Acquisition Cost (CAC)?
CAC is effectively the combined total of sales and marketing costs that a business spends on acquiring a customer.
How you calculate CAC is going to be defined by the nature of your business, and your sales and marketing setup. But in broad terms, it is going to include items like ad spend, attributable sales and marketing costs – like salaries, commission and bonuses – and any other incidental costs associated with bringing customers on board like tech stack costs.
It is a metric that is well known to externally funded businesses as investors are keen on it as a means to understand the profitability and growth prospects of the company. It is certainly one that your CFO is going to be interested in as they dig into the ROI and profitability of your marketing efforts.
It is worth pointing out here that there can be a bit of confusion between terms like CAC and CPA. So, in the following section, we set out to clarify what they mean and some of the differences between them.
How to calculate the cost of customer acquisition
So how do you go about quantifying the true cost of your customer acquisition activities?
CAC vs CPA
A good starting point for this is to take a look at CPA first which then leads us logically to CAC from there.
What is Cost per Acquisition (CPA)?
CPA is a metric that enables marketers to measure and track the cost of acquiring a lead from marketing and campaign activity. Or to track the cost to influence your target customer to perform a specific action – such as a signup or an ebook download. So, it can include conversion analysis that might not necessarily include your customer buying something.
Typically, CPAs are used to drill into the effectiveness of specific campaigns or even channels in your marketing mix and include the media costs associated with this type of activity. As opposed to assessing acquisition costs at a more global level within your business across all channels, headcount and resources – which takes you more into CAC territory.
What does it include and how do you work it out?
It includes all of the media spend associated with a specific campaign or channel, divided by the number of conversions the campaign has delivered. So, the calculation is a relatively simple one like this:
Total Media spend/conversions = CPA
How might that look in practical terms as a calculation? Imagine you have a single campaign which is looking to generate lead signups and your marketing spend is a total of £3,500 (£1,500 on Google and £2,000 on Facebook) and it has generated 200 conversions. The CPA for this would be £17.50 calculated as:
£3500 total media spend/200 conversions = £17.50
How does CPA differ to CAC?
While there are similarities in the way that CPA and CAC are used to measure the impact of marketing activity their focus is different.
CPA is more of a campaign or channel metric which is focused on assessing what it costs to generate contact with prospects who are not yet buying from your business. Whereas CAC is more of a business-wide metric aimed at assessing the cost of acquiring paying customers.
What is CAC?
CAC, as we have alluded to above, is a metric that enables you to quantify what you are spending – in total – to acquire a new customer for your product or service.
Depending on the type of business you run and the stage in your growth, it is likely that different levels of CAC will be acceptable in different circumstances. For example, high-growth businesses who are looking to establish themselves in a market and develop strong brand presence are likely to be able to live with a high level of CAC. As investors and external funders push for growth. However, as businesses mature the focus to efficiency and profitability then there might be an increased focus on reducing CAC.
And the industry you are in is going to have a bearing on your view of CAC too. The data below from StartupTalky shows how things can vary markedly from a CAC of $7 in the airline industry through to £395 on Technology Software.
The acceptable level of CAC is also going to be influenced by other key variables, not least pricing, where a premium pricing strategy and longer-term view on revenue can mean that a high level of CAC can be absorbed in the short term.
How do you work it out?
Essentially, you calculate CAC by totaling all of the sales and marketing expenses spent on acquiring new customers, in a given time period, by the number of customers signed up in the same period.
The calculation itself looks something like this:
Total cost of sales & marketing/new customers = CAC
So, for a business that spends a total of £10,000 on ads, £12,000 on salaries and £5,000 on tech stack costs – and generates 800 customers in the same time period – CAC is going to be £33.75 calculated as follows:
(£10,000 + £12,000 + £5,000/1000 = £33.75
This is the base level calculation for CAC which takes a global approach to assessment. But it is also possible to use the concept to dig into CAC levels for specific aspects of customer behaviour including renewals (Renewal CAC), geographical territory sales (Market CAC), customer re-engagement or reactivation (Reactivation CAC) or specific product sales (Product CAC).
What costs does CAC include?
All of your sales and marketing costs that are attributable to customer acquisition should be taken into account. This is going to be very specific to your business model but will include:
- Ad costs – paid for advertising on networks like Google and Facebook are likely to be central to your customer acquisition strategy (as you look to generate clicks, sign-ups and leads) and should be part of you CAC calculation
- Content and creative costs – many marketing strategies are heavily content-driven with requirements across website, video, blog and social media which need to be included
- Staffing costs – headcount in both sales and marketing is the most obvious cost to take account of here but be aware that you should also potentially take account of staff who provide support to these teams including IT and product support staff
- Tech stack costs – marketing and sales promotion is a tech-heavy business and your sales and marketing teams are likely to be using a range of tech platforms and tools with associated build, rental and maintenance costs
- Other marketing costs – anything that isn’t covered above. This might include production costs associated with your market efforts, agency fees and publishing costs
Why does it matter?
CAC matters for a whole host of reasons including:
- It is a key metric to know and understand if you are going to build growth that is sustainable for your business (it is a barometer of business health in a way, for example, that CPA isn’t)
- If you are funded, investors are likely to have a strong interest in it as it is linked closely to the long-term potential in your business
- It is a mechanism to help you to really understand the efficiency of your go-to-market strategy as a marketer and reduce costs – as well as improve your ROI by evaluating, tracking and managing it over time
- It helps you get the difficult balance right between ensuring that you are spending enough to bring in a sufficient level of sales and not overspending in a way that impacts the overall profitability of your business
What is LTV – and where does it fit in?
While CAC is a hugely useful metric it is also important to point out that it shouldn’t be assessed in isolation.
While it is useful as a mechanism for managing costs, where it really comes into its own is when you combine it with a metric like Lifetime Value. Lifetime Value is effectively the value you receive from any given customer during the lifetime of your relationship with them. And it is a useful metric to know and combine with CAC.
Why? Well, for example, high acquisition costs might not necessarily be a bad thing (or could be an essential cost of doing business in some markets where products retail at a premium) as long as you are able to recoup them profitably over the lifetime of your relationship with a customer. This is where the LTV/CAC ratio comes in really handy and it is calculated like this:
LTV CAC = LTV/CAC
3 tips for reducing customer acquisition costs
Here are a number of ways to reduce customer acquisition costs:
- Work out what channels are working for you – focus on driving acquisition costs down by gaining a clear view of what is and isn’t working in your customer acquisition mix. This means you need a view of the cost and impact of each and every marketing touchpoint on the customer journey.
- Reallocate spend to where it will have the most impact – then fully optimize your campaign acquisition spend by shifting wasted spend from channels and campaigns that aren’t generating a return into higher performing areas that are giving a return.
Take the example below where a client asked us to validate the figures they were getting from Facebook analytics around attributed revenue.
In this case, not only were Facebook reporting 68% more revenue than was properly attributed by our own Corvidae attribution platform. But an incredible 34% of spend was not optimal and Corvidae was able to identify that re-allocating it would generate an additional £1.6m.
- Seek out lower acquisition costs further up the funnel – one of the key inputs to acquisition costs is media cost and increasing levels of competition at the lower end of the funnel has led to huge increases in CPAs. In fact, Forbes has pointed out that in specific instances brands have seen Facebook ad CPA rises of as much as 89% in recent times.
The answer for brands is to take advantage of lower CPAs that are available further up the funnel. This is the approach we took for a major electronics retailer as outlined below using the Google ‘See/Think/Do/Care’ model
By using AI and Machine Learning techniques, like the ones used by our Corvidae platform it was possible to target users further up the funnel at the ‘See’ phase – where CPAs are much lower. Which enabled us to reduce CPAs by an incredible 87.5%.
- A/B test your efforts to improve conversion – conversion is pivotal in all of this. If you can increase your level of conversion it has a knock-on CPA, CAC and the whole acquisition picture. But to do that you have to be able to trust that your marketing data and that it is free from AdTech bias etc.
Optimise your customer acquisition spend with Corvidae
To be effective in optimising your customer acquisition spend you need a clear and accurate picture of the impact of each and every marketing touchpoint on the customer journey.
Corvidae, our patented cookieless attribution solution delivers, an attribution that amplifies customer acquisition – and ensures you get control over CPAs and CAC – by ensuring that you spend only where it matters.