One of the fundamental metrics startups and young businesses need to get a handle on early is their customer acquisition cost (CAC). Quite simply, CAC is the amount of money spent on acquiring a single user. More often than not, once you know your CAC, you want to figure out ways to decrease it. When you're new to marketing and acquiring new customers, you'll likely try a variety of campaigns. Some will work. Some won't. This trial and error is necessary, but it generally means you have a higher CAC than you want. Once you have your first CAC measurement, you'll know exactly what number you have to start beating.
MEASURING CUSTOMER ACQUIsition COSTS
Before brainstorming ways to decrease your CAC, you'll need to measure it in the first place. The simple CAC equation takes your marketing budget over a period of time and divides it by the total new customers acquired during that same period.
Once you know the CAC equation, you can see what high-level levers you have to decrease this number: either decrease your budget while keeping customer acquisition intact or increase your customers while keeping budget intact. Or, even better: do both!
Of course, you'll need to first figure out what constitutes your marketing budget. You can take a few different avenues to determine this:
- Conservative Approach: This approach would say throw everything and the kitchen sink into your total budget number. This would include everything from paid advertising and postage to agencies and even the percent of time your executive team spends on marketing activities. Taking a conservative approach naturally gives you as high a value as possible for CAC...but it also means you're never underestimating the metric.
- Liberal Approach: Some organizations take a more liberal view of marketing budgets and consider only those expenses used to actively acquire customers. This would limit your budget to advertising expenses, agency fees, and your marketing employees. It can make your CAC look really good...but it can also grossly underestimate what the number really is.
- Moderate Approach: As you can imagine, a moderate approach puts you somewhere in the middle. It includes every item under the liberal approach, but would also add in any software or tools you use to manage your activities, outside contractors who do design or copywriting, and other acquisition support efforts.
There is no single right or wrong answer (in fact, some organizations do different CAC calculations depending on their audience). Whichever approach you choose, be consistent! Once you have a benchmark in place, you'll want to measure it the same way time and time again. Otherwise, you'll never if an improving CAC number is due to your efforts or your measurement process.
Looking At Customer Acquisition By Marketing Channel
When thinking about how to improve your customer acquisitions costs, it's helpful to first take a step back and understand the different types of marketing activities and the buckets they fall into.
Owned Channels: These are channels that you own and control. This can include things like your website, social media profiles, blog or emails.
Earned Channels: These are channels that build over time as a result of efforts that you put into them. You "earn" them because while you don't control them directly, your efforts influence them. These include PR, unpaid influencer mentions, product ratings and reviews, and SEO.
Paid Channels: These are the activities that occur because you pay directly for them to happen. Essentially, they are ads. This can include Google Adwords, Facebook Advertising, paid influencers, sponsored content, etc.
Once you segregate your marketing activities, you can start to see which ones are really beneficial for decreasing CAC and which ones can drive that number higher and higher. Naturally, Paid Channels can play a huge role in increasing CAC. You're actively paying money into them which means your budget is going up. On the flip side, Owned Channels play a huge role in decreasing CAC. Sure, you have a team that supports these efforts, but they can be a really cost-effective team that gets a lot done. Earned Channels can play somewhere in the middle. You may be leveraging agencies to get press or influencer hits, or improve your SEO, all of which boosts budget. But the outcome of this can be so impactful that it knocks out that spend.
This doesn't mean shut off Paid and only do Earned and Owned activities. On the contrary! You often need to use Paid efforts to get the acquisition pump going. Instead, it means being deliberate about what channels you turn on and making sure each channel is running as efficiently as possible to keep spend in check while acquiring new customers.
Tactics To Decrease Customer Acquisitions Costs:
Once you know that some channels are more tightly linked to high CAC while others are linked to lower CAC, you'll want to look at each channel to understand how you can really get the most out of it. Here are just a few examples of activities you can tackle, by channel-type, to decrease your CAC numbers.
Decreasing Paid Channel CAC
- Measure Google vs Facebook Ads: Not all paid opportunities are created equal. Depending on your business, you may spend the same amount of money of Facebook as you do Google...but one returns way more customers. This can happen across other Paid channels too like Bing Ads or Adroll. You need to drill into each and every Paid channel you're spending money on to understand how each one is performing. If you're hell-bent on driving down CAC, shut off those channels that are less efficient and see if you have opportunities to spend more on better-performing channels.
- Test Ad Messaging & Design: Your product or service likely offers a variety of customer benefits. But you don't know which one really resonates with your customers until you test them out. The same can be said for messaging and design. Some will hit the mark and some will fall flat. To get the most out of your Paid channels, frequently test ad messaging and design. Once you get the right mix you'll find that it'll cost less to serve those ads and prospects will be more likely to click and buy.
- Optimize Influencer Payments: Paying influencers to talk about you can help drive a lot of interest in your product...or it can drive zero interest. If you're paying influencers, make sure to measure how each one is performing. You can do this by giving them special links to your site and enable tracking or giving them promo codes to use at checkout. Once you see who ends up being a dud, stop paying them. That'll remove marketing budget that's bringing in zero customers.
Decreasing Earned Channel CAC
- Improve Your PR Outreach: PR is an amazing way to leverage other peoples' reach to drive awareness. Getting a press hit in a major publication can be a fantastic way to boost new customer acquisition without paying a dime (or, paying a monthly retainer to a PR agency). As a result, making sure you're using it to its fullest—coming up with monthly pitch ideas, regularly pitching new journalists—can be a great way to cut down CAC.
- Write High-Quality Blog Content: When you write great content on your website, you create the chance of people finding your site organically on Google or Bing. This is called leveraging Search Engine Optimization (SEO). If you're not creating any content today, or if your content is just okay, ratcheting up content quality and quantity can increase the odds of being found via search engines. Since you're not paying these search engines money, it's a way to boost acquisition while keeping costs down. If you're just starting out, check out best practice guides from folks like Neil Patel. Or, leveraging resources like SEMRush if you want more technical best practice ideas.
- Build Product Reviews: Do you have a product or service that can be reviewed? Take advantage of other channels that have worked tirelessly for years to always be found whenever anyone searches for your product category. Think Yelp if you're a restaurant, or Angie's List if you're a home contractor. If you're in the software space, Capterra is a valuable reviews site. Making a deliberate effort to get ratings and reviews can make sure new customers find you without you spending money on advertising.
Decreasing Owned Channel CAC
- Improve Email Marketing: If you're fortunate enough to have a database of contacts, get the most out of it! By finding reasons to reach out to contacts—product sales, major announcements, new inventory, new blog posts, etc—you're finding ways to stay top of mind without spending any money on advertising. This is a fantastic way to keep CAC in check.
- Create Engaging Social Media Content: By creating valuable content, and sharing it with your social media followers, you'll increase the chances of bringing people back to your site (hopefully for a purchase) without spending much money. They'll also "like" and "share" the content, making it easier for their friends to discover too.
- A/B Test Your Website: Your website is often your strongest marketing advocate, but it may not be doing everything it can for you. By A/B testing your website homepage, call-to-action buttons, and other assorted content, you can make sure your website experience is optimized to convert traffic into paying customers. That means getting more customers...without increasing your budget.
Selecting Which Channels To Focus on First
The list above is far from exhaustive. In fact, it's a drop in the bucket of activities you could focus on to improve your customer acquisition costs. Yet each one takes an enormous amount of resources to do well. You'll naturally have to prioritize what do do first.
If you're already engaging in all three of these types of channels, we always say optimize your Paid Channels first. After all, these are the ones where you're likely spending the bulk of your marketing budget and the ones often most responsible for driving CAC up. By optimizing your Paid Channels, you'll likely put a healthy dent in your CAC number.
From there, what comes next is often a case of which channel represents the lowest-hanging fruit. If there are channels you haven't turned on but are known for being cost-effective, that's likely a good place to start. Alternatively, if you've turned all channels on, hone-in on those taking up the bulk of your team's attention. If that's where your internal resources are going, making sure you're getting the most out of them to drive CAC down.