As a startup owner, there are a lot of metrics you need to pay attention to – but, without a doubt, one of the most important is
Calculating CAC
At its most basic level, CAC can be determined by dividing the total costs of acquiring customers in a given time period – marketing budgets, the salary of your sales team, PR, and any other outreach or work you’re doing to close deals – by the total number of new customers in the same period. If you spend $1000 in a given month and generate 100 new customers, your CAC is $10.
That’s the easy way. But Ometria provides a more accurate (and more complicated) formula for nailing the exact CAC of your business:
CAC = (MCC+W+S+PS+O)÷CA
In this formula:
- MCC represents the total marketing campaign costs associated with acquiring the customers
- W represents the wages and salaries of your marketing and sales teams
- S represents the cost of software associated with marketing and sales
- PS represents the cost of any professional services you’ve engaged in your marketing or sales outreach (an advertising agency, for example)
- O represents whatever overhead costs you have associated with marketing and sales, and finally
- CA represents total customers acquired during the period.
While this formula is much more complicated, it lets you understand the components behind your CAC, and also what will be the most effective element to target in trying to lower CAC.
The truth is, it doesn’t matter how many users you have if you’re paying more to acquire them than they’re generating in revenue – whether you have 400 or 4 million, you’re still losing money. By measuring and managing CAC, you’re increasing overall cost efficiency while also freeing up marketing dollars that can be used to more effectively acquire more customers. For a startup trying to reach sustainable profitability and growth, those are two critical objectives. Accordingly, here are three simple tips that you can implement today that will lower your CAC.
Three Tips for Lowering CAC
#1. Measure Your Marketing
All too often, we see companies throwing money into marketing channels that are simply ineffective. Whether it’s PPC, Social Media, or content marketing, each channel has its advantages and disadvantages – but every company will see different channels as most effective. Make a practice not only of calculating your overall CAC, but also your CAC per marketing channel.
This gives you a simple way to understand what’s working and what’s not. When you see something that doesn’t work, kill it, and when you see something that does, double down. There’s no point throwing money into a marketing channel that’s not generating you customers, no matter how important it may seem.
#2. Enable Social Logins
This is a simple one, but it’s surprisingly important: social media login tools can make a big difference in your conversion rate. We live in an era where passwords are nearly ubiquitous – but unfortunately, people are notoriously bad at creating and remembering them. A survey by Web Hosting Buzz found that 86% of consumers say they’re bothered by having to create a new account to use a site or service. But, according to the same survey, 77% say social login capabilities are a “good solution that should be offered by any site” – making it an easy fix that makes a lot of users happy.
Having to create a unique profile for your site or product is another step between you and your customer, and it could easily be what pushes them out of the sales funnel and away from your company. Instead, think about enabling a social media login. By allowing customers to use their existing social credentials for login, you streamline the conversion process, ultimately improving conversion rate and lowering CAC.
#3. Target, Target, Target
Ultimately, optimizing marketing money is all about one thing: proper targeting. One of the most effective tools for improving targeting is a customer profile, also called a buyer profile or a persona. This is an outline and a summary of your ideal, perfect customer: it should include their buying habits, their search habits, what blogs they follow, what articles they’ve read, what influencers they care about, websites they’ve visited, emails they’ve opened, places they’ve gone, their values, their problems, their needs, and anything else about them that may be relevant.
The goal of this is to understand where and how your customers want to be reached – and then reach them there. For example, if you’re selling boxing gloves, PPC ads might be working fine – but if your ideal customer loves Ronda Rousey, maybe an endorsement from her or another MMA fighter would be more effective. Profiles help you brainstorm new, more effective ways of reaching your core target market, helping you refine your marketing strategy and keep your CAC down.
Applying CAC to PPC
Pay-per-click marketing, or PPC, offers an excellent way to see the metric of CAC in action. Google Adwords, arguably the most popular form of PPC advertising on the Internet, lets a business owner see the cost per click (CPC) associated with a given keyword and advertisement. Over time, you can collect this data and compare the CPC associated with the ads you’re running along with the keywords you’re targeting.
Keep in mind, CPC isn’t the same as CAC. CPC is a much broader number, representing everyone that clicks on your ad. CAC, on the other hand, only represents those who make a conversion. However, connecting your ad to a specific landing page can give you an exact number for how many people converted from that ad.
You can find the CAC for an Adwords ad by taking the number of conversions from the landing page and multiplying it by the sum total cost associated with all clicks to that page in a given time period. For example, if our CPC is $2.50 and we draw 50 visitors to the landing page, our aggregate total cost for all clicks is $125. If 4 of those visitors convert, this gives us a cost of $31.25 per conversion for this ad.
But, is this our CAC? Apt readers will answer no. Keep in mind, the cost associated with the Google ads is only one element in our total CAC – in the formula above, it only represents the MCC variable.
To calculate CAC, we’ll also need to incorporate the salaries of the marketer or salesperson who’s programming the ads into Adwords, the overhead costs associated with marketing outreach (if you don’t have a specialized marketing department, this should be some fraction of your total overhead costs), the cost of any PPC consulting or services you’ve hired, and any software costs – although in the case of Adwords, these last two variables could be $0. With that in mind, our CAC could easily range anywhere between $31.25 and several thousand dollars. It all depends on the business.
Case Study: Using PPC Ads to Optimize CPC
With this information, we can pinpoint the CAC both for specific ads and specific keywords. For example, if we run an online shoe store, we might find that CAC is extremely high on a given ad when targeting the term “shoes.” Conversely, we might find a lower CAC for the same ad when targeting “sneakers.” With that information, we know that this ad shouldn’t go towards the keyword “shoes.” We’d be much better off targeting “sneakers,” as this term optimizes the CAC for the ad, increasing the profit margin of each conversion from the ad.
No Right Answer
After all this talk of lowering CAC, you may find yourself asking – what’s an ideal CAC? The answer is that there is no answer – it all depends on your business model. It’s fine to pay $50 to acquire a customer if you know that the Lifetime Value (LTV – the total amount of money you make from a customer) is $100, but it would be disastrous to do that if your LTV is only $10.
Ultimately, it’s the ratio of these two numbers that matters – not either one alone. The point is to measure these things for yourself and discover which are most effective for you and your company. That’s a sustainable strategy for customer acquisition, growth, and long-term profitability.
So, time to ask yourself: what’s your CAC? When was the last time you calculated it, and did you calculate it across your various inbound channels? How does it stack up to your average customer LTV? And – most importantly – what do you think you can do to get your CAC down and your LTV up? Please share your own experience, your goals and strategies for lowering CAC, and your questions on the subject in the comments below.
