Do you know your business’s Customer Acquisition Cost (CAC)? Most business leaders can rattle off a horseshoes-and-hand-grenades (if not exact) accounting for labor, power, rent, materials and other overhead costs at a moment’s notice. In fact, many can happily recite the previous 4 quarters’ profit margins as though they were written on their heart. But, though the formula is grade-school simple and can yield important insights, cost of acquisition is rarely even thought about.
Of course, bottom-line figures are essential data points for decision-makers, but they represent only the bare minimum of knowledge about your business. You simply can’t look at a change in margin and make any kind of decision about the business—you need more information. If a doctor fills out a prescription based solely on your heart rate, how likely are you to take those pills? Personally, I’d be out the door before she could replace the cap on her pen. Also like your heart rate, once a problem becomes apparent on the bottom-line, the real issue has been growing unchecked for some time.
Why you should know your CAC
There are a number of reasons to add the cost of customer acquisition to your list of must-know stats. First, as I mentioned earlier, the calculation is super simple:
(All costs spent to acquire customers [i.e. marketing]) / (number of customers acquired in the period)
How easy is that? Easy calculation is one thing; what is it actually good for? From a bird’s eye view, business investors will use CAC as an indicator of how quickly a business can grow. For marketing purposes (our favorite purposes), it’s a more vital and practical metric.
First, tracking your company’s CAC can provide nearly instantaneous feedback on your strategy and its implementation. For instance, if a simple adjustment to your marketing campaign’s demographic targeting results in a serious change to CAC, you’ve gained important insight about your ideal audience. Or, you can simultaneously test a number of strategic factors with a well-designed A/B(/C/D… etc) test.
Another benefit of tracking your customer acquisition cost shows up in budgeting. At the ground level, decisions about when, where, and how much to invest in product/service promotion begins to resemble science more than gambling. It’s also extremely useful in long-term planning & budgeting discussions. Most marketers know well the challenge of arguing for increased budget to financial stakeholders, who regard everything qualitative with skepticism. However, armed with a tried & tested Customer Acquisition Cost, marketing can make an evidence-based argument for budget. CAC lets marketers speak in the language that finance understands (for once).
Customer Acquisition Cost is not the ‘one metric to rule them all’ (as Brittney might say). But, though it is one KPI among many, it should be on the short list of those you always have on hand. If you’d like to improve your company’s CAC, get in touch with KE; we’d love to help you develop and implement a winning strategy.