Customers are the lifeblood of any business. You can’t make money without people to buy your goods or services. If you’re doing things right, your customers are the very reason you’re in business at all. And yet despite how crucial they are to any company, many business owners don’t have a good sense of exactly how much it costs to land a new customer.
With all the metrics business owners have at their fingertips — leads, sales, conversions, churn, the list truly goes on forever — one that many companies fail to consider is their customer acquisition cost, or CAC. At its simplest (and no doubt, CAC can get really far from simple), CAC measures new customers against the cost it took to secure them.
A strong foundational knowledge of your company’s average CAC can help you strategize your next move, decide if you can afford to expand in a certain area or even whether you should bring on new staff. And it’s an invaluable way to determine how effective your lead generation, marketing and advertising messages are.
Given that CAC provides insights into the effectiveness of your messaging, it should be no wonder that companies using mature content marketing strategies can see their cost of acquiring new customers drop dramatically, either bolstering the bottom line or giving the business more room to grow.
What Is CAC & Why Does It Matter?
Abbreviated CAC, your customer acquisition cost is somewhat self-explanatory: It’s what you pay to convince people to buy your goods or services. It varies wildly depending on industry, but for any business, it provides crucial insight into how effective marketing and advertising practices and campaigns are.
Surely you know your sales figures and lead generation data. You can probably recite those off the top of your head. But what about your company’s CAC? This measure is one way of looking at the return on investment, or ROI, of your marketing and advertising efforts. Particularly for companies with a strong digital presence, which is pretty much every company these days (96 percent of small businesses use social media), CAC is used by businesses and investors to determine how successful a company is and what its potential could be.
At this point, there’s another acronym you should get to know, though we’ll only be touching upon it here for simplicity’s sake: customer lifetime value (CLV). When used together, CAC and CLV give you a bottom-line indication of whether what you’re spending to acquire new customers is worth it. Just as CAC measures what it takes to acquire a new customer, CLV helps predict how much revenue you can expect from that customer over the lifetime of their relationship with your company. And as with CAC, what is considered a “good” CLV depends largely on your industry and even on your specific business model, but an obvious way to understand CLV is that companies with CLVs higher than their CACs should be profitable ones. In other words, if you will gain more money from a customer over their full relationship with you than you will spend in acquiring them, your business should be profitable.
Certainly other variables are at play in determining just how profitable a business is, but one thing is for sure: Companies with CACs equal to or higher than their CLVs won’t last long. Startups, in particular, should closely monitor both metrics to determine if they even have a viable business model.
Depending on your industry, repeat business is crucial. But savvy business owners know that landing new customers is just as important. In fact, in a recent survey, two-thirds of small-business owners said finding new customers is a top concern.
How to Figure Your CAC
Because every industry is different, it’s impossible to create a one-size-fits-all metric, but we’ve developed a solid formula to help you begin to create a picture of your company’s CAC. You can download that here, and follow along below as we explain what it all means.
A few pieces of information you’ll need to measure your own CAC:
Website visitors: Our formula separates paid and organic website visitors, but strictly speaking, that’s not completely necessary. We find it’s helpful, though, to distinguish so that you can more clearly see where your traffic is coming from. You should already have this information, so you might as well split it out. Plus, organic traffic is where you should be targeting your content marketing efforts.
New customers: Only list new customers here, not repeat clients or buyers. Depending on your business model, this could be quite easy. Say you’re a subscription SaaS provider; these numbers will be at your fingertips. Other businesses, such as retail stores, might have a tougher time splitting new customers from all buyers. Content marketing also can help you understand these numbers through promo codes and other offers.
Advertising & marketing spend: Total up what you spent on advertising and marketing campaigns, related staff and freelancers and any other connected costs, such as software.
Important note: As we said above, these models can get incredibly complex, but our goal here is not to provide a one-size-fits-all formula but rather to get you thinking about these important metrics. So some formulas will also include your CLV or, depending your business model, trial subscriptions or cancellations or even the overall rate of inflation. No doubt, the more detailed your formula gets, the more accurate your CAC should be. However, for most companies, a quick-and-dirty calculation provides ample insight.
For our purposes, we’ll invent a small brewery with about $2 million in annual revenue. Let’s call it Punky Brewer (please clap at our ’80s TV reference).
Punky Brewer has a decent enough website where they talk in detail about each of the brews they make in-house as well as the ones they sell from larger breweries. The site also is consistently updated with the seasonal food menu and local events the establishment hosts, like trivia nights and live music, but they don’t have a consistent content marketing strategy. They get about 800 unique visitors per month, with 600 of those being from organic traffic and 200 being from paid traffic.
The brewery has a loyalty program where visitors can get free drinks and food, and so they have a pretty good idea how many new customers they see each month in foot traffic (meaning those who don’t present their loyalty program cards or numbers upon purchase). That generally averages out to about 25 customers, though, of course, when the weather is nice, those numbers go up. But for our purposes, we want a good median number. We also don’t know at a glance if any of those new foot-traffic customers had visited the website, but considering that 96 percent of shoppers have searched online for a local business, it’s likely there’s a good deal of overlap in those audiences. Again, we want a formula we can apply generally rather than something that works in 100 percent of cases, so we’ll assume that about 3 percent of our website users will become in-person visitors, based on a U.S. website conversion average of 3 percent for online shoppers. Again, we know that almost every shopper visits a company’s website before making a purchase, so it’s very likely that 3 percent is a conservative estimate. Based on current website traffic, that gives us an additional 24 customers per month for a total of 49 new customers acquired.
Punky Brewer is pretty typical in its industry in terms of spending on advertising and marketing. The national average for beverage manufacturing is 2.73 percent of revenue spent on advertising, and Punky Brewer spends slightly over the average at 2.75 percent. Some other notable averages: Furniture stores spend 4.44 percent, while mortuaries spend only 1.83 percent. The average for all industries is just over 1 percent. Additionally, Punky Brewer employs a marketing and advertising director. Her monthly cost is $5,400 with salary and benefits. So that’s $4,550 spent according to the industry average, plus the marketing director’s cost of $5,400 for a total of $9,950 monthly advertising and marketing spend.
From here, it gets much simpler, as we take our spend ($9,950) and divide that by our new customers acquired (49) to get a total CAC of $203. We don’t know what your Saturday nights are like, but given that the average American consumer spends as much as $1,200 per year on beer, according to one survey, a CAC of $203 is pretty reasonable. But we’ll show you how content marketing can make that figure even more attractive.
How Content Marketing Can Slash Your CAC
Punky Brewer spends $4,550 on advertising and marketing, not counting the salary and benefits cost for their marketing director. She wants to drop their spend even lower while boosting online and in-person traffic. And she’s smart, so she knows that a strong content marketing strategy is just what Punky Brewer needs. Why?
Content marketing reaches and moves consumers in a way that traditional advertising and marketing methods simply can’t come close to. In fact, 90 percent of consumers say they like to see custom content from brands.
Content marketing has a cost savings of 62 percent when compared with traditional marketing, and studies show companies that frequently publish blog posts see nearly four times the traffic as those that don’t publish or don’t publish enough.
So let’s go back to Punky Brewer and run our formulas again, this time with content marketing principles and effectiveness applied. We still have our 25 new foot-traffic customers per month, but content marketing has boosted website traffic by 250 percent, meaning we’re getting more than 100 new customers per month. Plus, it’s lowered our non-salary marketing spend from $4,550 to just $1,729. So that gives us a new CAC of just $65.40, down from over $200. Surely the brewmasters of Punky Brewers can think of a lot of ways to reinvest that $137!
What’s the Bottom Line?
We encourage you to hack our formula. Take your own numbers and apply them. We recommend you do more than just blog and if you do, your traffic will surge even further, dropping your CAC even more.
People are bombarded with messages every moment of the day, and it’s incredibly difficult to cut through the clutter. But it’s even more crucial now that you are doing so with messaging that speaks to them directly in the ways they will be most receptive to hearing.
Consistent, clever, creative content marketing can boost your business like nothing else. It isn’t magic, let’s be clear. But providing value to your audience is the best way to turn them from just another audience member into an engaged, delighted customer. And every audience member is a potential new customer.