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 t