Measuring Customer Acquisition Costs
Here is a maxim every business founder should not only take to heart but work at every single day: You can’t manage what you can’t measure.
And while there are many operational metrics that should be constantly measured and analyzed, perhaps none is more important to the success of a business than the optimization of your CAC. It’s even more important if you are looking for funding for your startup because it’s one of the metrics to which Investors pay the closest attention. The more efficient your CAC, the more attractive you look to investors.
CAC is an acronym for Customer Acquisition Cost. In other words, how much does it cost your business to target a new customer, engage the same, and walk him to your cash register? This process may also be called Customer Conversion, but the concept is the same. What does it actually cost to move a prospect from the top of the sales funnel to the bottom of it? That is, converting a sales prospect to a paying customer.
So how do you measure your CAC? Basically, your CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, its CAC is $1 per customer. But to be accurate and actionable, calculating CAC is much more complex. To be completely accurate, you need to ensure that your marketing costs reflect all associated costs as well, such as sales and marketing salaries and commissions, referral fees, credits and discounts. And you need to separate customers converted through paid marketing efforts as compared to organic ones.
So now that you are able to accurately measure your Customer Acquisition Cost, how do you manage it? For most, the management process of any metric means only one thing: result optimization that drives enhanced operational cost efficiencies. In other words, how do you drive down your CAC while increasing your Customer Conversion rate?
To do that you need to start at the top of your sales funnel. For a web-based business, the very top is the number of unique visitors your site attracts for each time period measured. Of that number, what percentage of those unique visitors is actually converted to paying customers: 2%, 4% or maybe a fantastic 8%? Regardless of the percentage, it will only give you a baseline measurement from which to begin your work. That percentage will most definitely not tell you how you can improve your conversion ratio.
The only way to improve your conversion ratio is to A/B test everything in your marketing arsenal. A/B testing, sometimes called split testing, is comparing two versions of a web page, two versions of a sales solicitation email, two versions of a print, radio or TV ad, to see which one performs better for purposes of customer conversation. By comparing the two versions side by side, and then looking at the results each one achieves, you will have the data necessary to optimize your critical marketing metrics such as your customer conversion efficiency and customer acquisition costs.
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