Insights provided by Oracle NetSuite
If your consumer business is like most, you’re hungry for new customers.
Tracking and optimizing your customer acquisition cost (CAC) is the way to keep cash flowing when competition for potential customers is at a peak.
CAC tactics especially relevant to current times include segmenting customers by acquisition channel during analyses and experimenting on new social media platforms.
If yours is like most businesses, you’ve started out this year hungrier for new customers than in the past few years. The good news is you’re not alone: Businesses damaged in 2020 want to gain ground back, and those that thrived want to keep the momentum going. The bad news is you’ll all be using the same marketing channels to get in front of new customers. If customer acquisition is not managed carefully, new customers can end up costing more than you’ll make from them.
In our comparison of business leaders’ priorities in late 2019 vs. late 2020, improving customer experience and improving existing products and services were popular choices year over year. And this year, two initiatives saw jumps in priority: improving supply chains and improving sales. About 39% of respondents cited the latter category as high-priority a year ago, yet over 60% say they’re prioritizing it in 2021
More good news: Shopping habits shifted dramatically in 2020, when U.S. consumers shattered ecommerce records while social distancing. And the retail trend continues. In 2021, monthly retail sales have increased year-over-year in many categories. In a particularly impressive February, retail sales grew 9.9% over the prior year, according to Department of Commerce data. Per our survey data, B2B spending in 2021 will look a lot like businesses had predicted for 2020, with increases in production, capital spending, sales, marketing, payroll and especially technology. The only area in which spending won’t increase is non-IT operations as businesses downsize their office space.
The bottom line: If you want new customers, chances are you can find them — but be smart about it, and watch your costs. And remember that the place to find those customers is online.
Customer Acquisition Costs in 2021
Digital ad spending worldwide shows no signs of slowing. In fact, by 2024, it’s expected to cross the half-trillion-dollar mark, according to eMarketer. That’s an increase of nearly 20% per year over the next three years.
Digital ads have also gotten pricier on a unit basis.
“Acquiring new customers has gotten significantly more expensive in the past year,” says Carbin. “The pandemic has forced everyone to rely more heavily on digital marketing. As a result, the cost for PPC ads, content marketing and SEO have all gone through the roof.”
The mere thought of it makes you immediately value your current customers all the more. It’s worth noting that cross-selling and upselling are often cheaper ways to increase revenue — but that’s a different story.
Online advertising costs can vary quite a bit depending on the platform and industry. Trends and events around the globe can also affect ad spends. For instance, the travel industry saw ad spend decline by a whopping 41% YoY in 2020, according to eMarketer.
It costs money to acquire a new customer, but be careful not to spend so much per customer that the numbers don't — and won’t — shake out. You also don’t want to chase too hard after customers who are likely to buy once and never return. That’s why you need to get clear on your prime buyers and the costs of attracting them.
What Is Customer Acquisition Cost, and How Do I Calculate It?
Customer acquisition cost (CAC) is the dollar amount you spend to acquire new customers. Before you work on improving CAC, understand your numbers.
First, determine a period (typically a month or quarter), and organize all of your marketing and sales expenses for that period. Then, see how many new subscribers or customers you gained during that time.
The CAC formula is:
TOTAL SALES & MARKETING COSTS / NEW CUSTOMERS = CAC
But, you want to go beyond $100 spent in costs / 10 new customers = $10 CAC. Some marketers stick to the costs of advertising, like a Facebook ad, and the result, like 10 new customers. But this doesn’t come close to delivering the kind of data you need to ensure customers drive more revenue than they cost to acquire. When you add in all the operating costs for a marketing campaign — platform costs including software and tools, as well as salary considerations including full-time employees and contractors — you’ll get a clearer picture of your CAC.
On the revenue side, you’ll need to determine your customer’s lifetime value (LTV), the total amount an average customer spends with your business over time.
The LTV calculation is:
LIFETIME VALUE = (AVERAGE CUSTOMER SPEND PER INTERVAL x CUSTOMER LIFESPAN) — (COST OF PRODUCTS OR SERVICE + CAC)
A good LTV:CAC ratio varies among industries, but the figure typically cited is 3:1. Assuming your customers stay with you for more than three years, you can do the math in your head: The first year, you’ll be upside-down or roughly breaking even. That should punctuate the need to understand what makes a great customer.
Identifying your best customers and how they find you is job one. If you don’t know who your customer is, where they hang out online or their buying habits, you could be wasting a lot of money.
5 Common CAC Tracking Mistakes
When working with your CAC numbers, here are top blunders to avoid:
1. Not tracking your numbers because you’re “too small.”
Being a small business isn’t an excuse to ignore your numbers. Get in the habit early of digging into data on your marketing campaigns, or at least appoint someone to manage and report them to you — and do it often.
2. Not consistently recording and retaining raw data.
If you analyze campaign performance in Q1 and not again until Q4, you run the risk of wasting money on campaigns that don’t produce the results you need. Check your numbers regularly, so you can review trends and make adjustments.
3. Not correctly recording your data.
Broken or missing tracking can leave you guessing as to which efforts are actually working. Make sure your analytics tools are set up correctly, and investigate any data that seems off.
4. Not understanding your data.
Perhaps a blog post on your site gets a lot of traffic. Dig deeper. Is that traffic resulting in sales, or is SEO bringing in misaligned visitors? Before leaning into marketing initiatives based on perceived success, confirm you’re correctly analyzing the results.
5. Not working the sales funnel.
Not every marketing effort will produce sales — nor should it — but each should improve awareness, stir curiosity and lead to further engagement. Depending on your offering, new customers may see and engage with a number of your marketing messages before they actually contact or buy from you. Embrace it, and learn to guide engagement efficiently. That requires multiple pieces of content for prospective customers to engage with. Depending on your product, content could take the form of customer testimonials or case studies or videos on product use and benefits. Developing a community of users is a powerful tactic.
Each of these mistakes can affect your bottom line.
6 Ways to Be Smarter About CAC This Year
First, determine the financial KPIs and metrics you want to track for each customer-acquisition campaign. For instance, where does each campaign fit within your lead funnel? Are you looking to make a sale or get a new newsletter subscriber or get a prospect to download a solution paper?
Then, develop a tracking system so you can get clear on your customer data and monitor how campaigns are performing. Note that even the youngest companies must work to establish themselves — and that campaigns can and should look differently in 2021. On the consumer side, in more social times, a new mainstreet business might’ve held an open house. Manufacturers would visit prospects or invite them to come and learn about the company’s products and why those products are preferable. Services companies often start with demonstrating an understanding of the business problem they seek to solve. Those goals are still the right ones, but the methods of achieving them are usually different now.
Here are six tactics — both evergreen and particularly relevant to 2021 — you can use to improve your CAC.
1. Segment by acquisition channel.
By segmenting customers into groups before calculating their CAC and LTV, you’ll develop a more accurate financial model for each segment. With that in hand, you can invest more in channels that produce higher-value consumers.
“Segmenting by acquisition channel is an important best practice because the acquisition cost and behavior of customers almost always differs from channel to channel,” says Bruce Hogan, CEO of SoftwarePundit.
According to Hogan, the two most important segments to track are:
the acquisition channel through which the customer was acquired, and
whether the customer is a one-time or ongoing customer.
“Customers who are acquired via word of mouth or customer referrals are typically acquired for less and are more loyal, with higher lifetime values,” he says. Meanwhile, “customers acquired through deep promotional campaigns typically have higher acquisition costs and lower lifetime values.”
Therefore, marketers should use channel-specific LTVs to determine their target customer acquisition cost — “target” being the key word — for each channel, instead of applying their overall average CAC to each one.
Analyzing one-time versus ongoing customers gives you the information needed to tune campaigns to attract more desirable customers. This “allows marketers to increase their CAC targets for ongoing purchases in each channel,” says Hogan. However, to do this, you’ll need to consistently measure the number of repeat customers you gain through these campaigns.
When setting targets, keep in mind that benchmarks have likely changed over the past year or so.
“After 2020, I think it's important that small businesses realize that consumer behavior, and therefore customer lifetime value, might have changed,” Hogan added. “For example, average order values might be different, or churn could be higher. As a result, while it makes sense to start operating with a pre-pandemic CAC target, businesses should closely monitor performance data to determine if any changes to CAC become evident.”
2. Review your CAC often, and adjust as needed.
On certain channels, the costs of advertising fluctuate over time. That’s why it’s essential to review your CAC regularly and make adjustments when you need to.
Cole Torres, for example, says CAC rose significantly for his digital marketing agency last year.
“We realized there was a smaller pool of smaller businesses looking for additional services, and the ones that were interested in [our services] were often operating on a tighter budget than usual,” says Torres, owner of Local Eye Media.
“... When times are good, a single new client can result in a significant amount of revenue. When things are slow, a new client will often spend less with us, even if they are interested in more [of our offerings],” he says.
So, Torres’s business lowered its CAC to match the potential revenue a new client would bring in, keeping CAC aligned with what customers were willing to spend at the time.
“We relied more on manual outreach and accepted that business [would] be slower for a period of time,” Torres says of lowering Local Eye’s CAC. “For existing leads, we spent time — instead of money — continuing to keep in contact with them and stay top-of-mind. This was a long-term play based on the prediction that when spending increases, we will be positioned as the vendor of choice for those that were able to afford our services during our initial conversations.”
Now that business is picking up and prospects’ budgets are increasing, Torres is seeing a positive change.
“Several leads we would have considered lost in a normal market are now coming around,” he says. “This will give us additional capital to expand our own campaigns, letting CAC creep up as we look toward growth again.”
3. Educate your customer.
Long-form blog posts, videos, emails, social media — whatever the medium, use it to help your ideal customer understand your product.
“Education is important — more clarity, more sales,” says Smart Hustle’s Ramon Ray. “You want people to have everything they need so they don’t even have to look at a competitor. You want them to go, ‘You gave me everything I need to know, and I’m ready to buy.’”
As someone who does a lot of video calls, Ray was particularly impressed with the marketing efforts of headset brand Jabra.
“They got me via a Facebook ad first, so it was clearly well-targeted,” Ray says. “Then, with retargeting, they kept putting the ad in my face. Tying it back to [product] education, they put so much information out there. Their website sold me. I didn’t have to make a phone call [before buying], which also lowers CAC.”
4. Make it personal.
Along with education, Ray recommends really getting to know your ideal customer so you can target them better and lower your CAC.
“A lot of money is being wasted selling to everyone vs. to the target end user,” says Ray.
For example, it would make sense for a men’s grooming brand to target only men with its ads, vs. blanketing the web haphazardly. It seems obvious, but it’s a mistake some companies still make.
Smaller businesses might be desperate to gain customers and make up for lost ground. But if you’re not carefully targeting and nurturing your ideal customer, it won’t be money nor time well spent. Put in the work on your customer experience strategy, mapping out your customer personas and their buyer journeys so you can reach your ideal user.
5. Experiment with popular social media channels.
It seems like a new app or platform rolls out every year. And while you don’t need an active presence on each one, it’s worth seeing how you can use these channels to attract customers.
TikTok has 50 million daily users in the U.S. alone, and the app is especially popular with millennials and Gen Z. Gymshark, the workout clothing brand, has 2.5 million followers on the platform. The online retailer has done an excellent job of leaning into influencer marketing (more on that below) and hashtag and workout challenges to grow its user base and connect with its followers in fun ways. Invested customers are loyal customers, so nurture your community.
Also consider Instagram, especially if you’re a visual brand. It’s the fifth most popular social network with 1.2 billion users, and it allows for a little bit of everything — still images, video Reels, 24-hour Stories and a longer-form video platform, IGTV. Cosmetics brand e.l.f. has 5.7 million followers on Instagram. Via its Stories, Reels, and IGTV channel, the brand promotes its products, hosts virtual launch parties and showcases limited-edition makeup kits.
If your ideal user is on these channels, create a business profile and experiment with ways to reach your audience. For instance, on top of organic-growth methods, you might be able to create low-cost video ads that convert using simple video creation tools like Vimeo, Storyblocks or Promo, according to Social Media Examiner. You can also cap your bids on Facebook ads and use LinkedIn features that help you target your ideal customer for cost-efficiency, according to guidance from Falcon.io.
6. Consider influencer marketing.
Through sharing an aligned audience, an influencer can help promote your product through social media posts or videos. By 2022, brands are expected to spend a lofty $15 billion on influencer marketing, according to Insider Intelligence and Mediakix data. This type of marketing is not only popular but also highly effective: One study — from Influencer Marketing Hub, no less — found that businesses generate $5.20 per $1 they spend on these types of campaigns.
There are lots of tools that can help you pinpoint the right influencer for your product and budget. Some influencers work for a flat fee, while others will promote your product regularly for a percentage of any sales made through their network. You can also work with micro-influencers, who typically have a smaller but highly engaged following.
The results go beyond “vanity” metrics like new followers: A couple of years ago, Bigelow Tea worked with lifestyle bloggers on a campaign that yielded the company an 18.5% increase in sales. Working with a prominent micro-influencer can expose your business to more potential customers or reengage current ones, offering a decent return on investment.
AlixPartners conducted a study of over 1,100 consumer products executives and their digital ad spend, which accounted for $60 billion in 2018. The team found that for more than half of the spend, return was negative or ROI was not even measured. To state the obvious, you’ve got to measure ROI.
Since newly-acquired customers may not pay for themselves for a while, finance teams should be intimately involved in tracking acquisition costs, as well as new customer revenue across channels and campaigns. Marketing teams should welcome the partnership, as it means they can focus on tuning campaigns while finance watches the dollars.
“Calculating ROI generally works the same across all marketing channels. The key is having good data tracking in place,” says Hogan. “[Know] how much you are spending on specific campaigns, and the impressions, clicks, leads, transactions and/or revenue those campaigns are individually driving. If the campaign generates more business value than it costs, it's profitable and should be continued and scaled up.”
That also means shifting gears if something isn’t working. For example, don’t be afraid to course-correct if Instagram proves an ROI-lacking marketing channel for you.
Keeping Customers Engaged
Acquiring a new customer is more expensive than retaining and nurturing an existing one. So, while you can prioritize acquiring new users, be sure not to neglect your current customers. Some tactics:
Surprise regular customers with occasional discounts or early access to new products and services.
Create a referral program to reward current users and incentive them to share your brand with their friends and family.
Run a contest on social media and ask current followers to tag others.
Provide upsell opportunities and showcase tailored product recommendations to customers at checkout to improve LTV.
Lowering CAC, Boosting Teamwork
As mentioned above, marketers should be in partnership with finance experts in efforts to manage CAC. And if sales runs separately, it’s useful to partner there too.
As with many initiatives, you should “lower and reduce the silos in your company,” says Ray. “If the CMO doesn’t have a handle on what sales or customer service is doing, that’s a problem. People [on the team] need to be on the same boat, rowing in the same direction.”
Kathleen Garvin is a personal finance writer based in St. Petersburg, Fla. She worked as an editor and writer for a leading personal finance digital publication for nearly four years and has appeared on 6abc in Philadelphia as a consumer finance expert.