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The Cost of Acquiring Customers

The cost of customer acquisition isn’t something we all know off the top of our heads. We’re constantly checking conversion rates and revenue but what we forget to factor in is how those converting customers were gained and how much that cost us.

We all know the stats to check every day on an ecommerce store. Traffic, revenue and of course conversion rate are all quick, easy indicative metrics of a day’s success or failure. However, there is one more metric which is becoming more and more widely recognised and that is the Customer Acquisition Cost (CAC).

Any ecommerce or marketing manager worth their salt knows the importance of managing their budget intelligently and making data driven decisions about where their allowance is invested before they spend it. Tools such as Google Analytics are incredibly powerful when it comes to understanding the channels which are referring traffic to your website, whether it’s Facebook, an affiliate partner, your Google AdWords or an EDM. From this high-level overview, an ecommerce or marketing manager can pinpoint which channel they want to focus their resources on.

How do I calculate my average CAC?

The most basic way to calculate your CAC is by dividing the amount of dollars you have spent from your marketing activities by the new customers you have gained. These efforts cover everything from PPC campaigns to content marketing.

Say you spent $1,000 a month on your marketing activities and you gained 150 new subscribers. At a glance, each subscriber has cost you $6.66.

This gives you an average indication of your CAC. Having any metric is a good start and gives you a sound understanding of what you can expect to gain in return for your marketing efforts but calculating your CAC can quickly become tricky as your marketing activities multiply.

What if my marketing spend is split across more than one area?

If your marketing activities are varied across multiple platforms you might want to understand the cost of customer acquisition in more detail. For example, say your $1,000 spend was split between Facebook ($150), a sponsored event ($500), EDM sends ($100), SMS Notifications ($50) and a collaboration with an influencer for a blog post ($200).

Generally speaking, EDMs and SMS notifications are for your existing customers and wouldn’t necessarily attract new ones, so those outgoing costs shouldn’t be attributed to the growth of your database. So in this example, the EDM and SMS spends could be deducted and the cost of the 150 new subscribers should be calculated using the $850 which was spent on activities targeted at gaining new subscribers.

This brings the average CAC down to $5.66.

Generally speaking, the best practice for managing what you spend in any department in any business is tracking each $ against each activity. If you’re not already doing this, a simple way to achieve this is using a Google Spreadsheet, which you can easily update and manage with each amount you invest. Google Spreadsheets can also be shared with multiple teams and team members in your business so anyone, at anytime, can update the totals to see how the CAC is affected.

An easy format to follow is something like this:

Let’s go back to our hypothetical, but this time on a more granular level. At this point, you’ve spent $850 on sponsoring an event, Facebook marketing and a collaborative blog post with a relevant influencer. In return for this, you have 150 new people engaging with your business. What if you gained 100 new subscribers from your Facebook marketing and the remaining 50 were split between your blog post and event?

That would mean the CAC from your Facebook marketing would be a staggeringly low $1.50.

It would also mean the 25 subscribers you gained from your event would have cost your business $20 per sign up and the blog post subscribers have an $8 price tag.

So, what should I do with this information?

Most businesses want a solid understanding of their most valuable marketing activities before they re-invest in them so separating your marketing outgoings to calculate the cost of each acquired customer is a smart idea. Thanks to more sophisticated reporting tools which are becoming more of a standard feature of most marketing platforms, tracking the success of each campaign is fairly straightforward.

Using Facebook reporting, Instagram Insights, Google Analytics and segmented sign up methods, you can start to track the customers who sign up after each activity. Building on the earlier spreadsheet example, you can start to gain a more detailed insight to the return on investment for each spend.

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