The Importance of Understanding Your Customer Acquisition Costs
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As a marketer, you’re probably accustomed to evaluating your success using metrics such as revenue, pipeline, and cost per acquisition (CPA). However, there’s another critical metric that your CEO and CFO have their eyes on: customer acquisition cost (CAC). Why? Amidst consumer fragmentation, increasing rising marketing expenses and decreasing conversion rates, CAC has become a critical way to define the success of any marketing strategy.
HOW IS CUSTOMER ACQUISITION COST DEFINED?
So, what exactly is customer acquisition cost, and why should it matter to marketers? CAC refers to the total cost incurred by your company to acquire a paying customer. It takes into account all expenses related to marketing and sales, including employee salaries, commissions, taxes, benefits, business travel, training, and recruiting costs. To calculate CAC, divide the total GTM spend by the number of customers acquired during the same period.
Understanding Customer Acquisition Cost is not just about crunching numbers; it’s about aligning your marketing efforts with the broader company goals. By keeping track of CAC, marketers can show their financial acumen and contribute to strategic discussions with the leadership team. This metric provides a deeper insight into the health of your business than just revenue and pipeline numbers because it considers costs as well.
CALCULATING CUSTOMER ACQUISITION COSTS
One key distinction between CAC and CPA (cost per acquisition) is that CAC focuses solely on paying customers, while CPA may include non-paying leads or other conversions as acquisitions. Moreover, CAC gives a holistic view of your entire marketing and sales organization’s expenses, while CPA typically analyzes specific channels or campaigns. Here’s the formula:
$ Total Spend
_____________
# of Customers Won
To further analyze CAC’s impact, it’s helpful to consider “subtypes” such as Marketing CAC and Advertising CAC. Marketing CAC evaluates the effectiveness of your overall marketing efforts, while Advertising CAC focuses specifically on the impact of ad spend on customer acquisition.
Remember, the denominator for Customer Acquisition Cost remains the same across all subtypes—total customers won. This approach ensures a comprehensive evaluation, considering the limitations of attribution technology and the influence of ad spend on organic traffic.
WHY IS YOUR CUSTOMER ACQUISITION COST SO IMPORTANT?
So, why should marketers care about CAC? Sidney Waterfall, a seasoned General Manager, points out that understanding these metrics is crucial for marketers to step up and contribute as business leaders. CAC can help executives and finance teams assess the efficiency of your GTM organization. When marketers actively engage with CAC data, it builds trust and opens up avenues for meaningful discussions on budget allocation and strategic adjustments.
NEXT LEVEL MARKETING METRICS
Once you’ve calculated your Customer Acquisition Cost, you can explore additional metrics like CAC payback and the LTV:CAC ratio. CAC payback measures the time it takes for a paying customer to recoup their acquisition cost for the business. This metric can inform your paid strategies and identify areas for potential marketing investment.
The LTV:CAC ratio, on the other hand, reveals the health of your business. A higher ratio suggests that a customer’s lifetime value is significantly greater than the cost to acquire them, indicating a healthy investment. Conversely, a lower ratio may prompt a reevaluation of marketing strategies and spending.
WRAPPING UP
Embracing CAC is not just about embracing math but also embracing your role as a strategic marketer. Whether you’re climbing the ranks within your organization or transitioning to a leadership role, understanding CAC elevates your importance and influence. Embrace these metrics, and you’ll find yourself better equipped to contribute to the success of your company. Remember, curiosity about CAC is not only acceptable but encouraged for anyone at any level, signaling your commitment to driving growth and excellence.
