Data is the marketing person’s best friend. I still have nightmares about standing in front of executives with nothing more than some vague, “we think it’s working” kind of rhetoric. Those were the days before everything could be tracked and close looped. In fact, now there is so much data that you can easily get lost trying to figure out what the most important stuff really is.
There are a lot of cool data that you should track, but my favorite is Customer Acquisition Cost (CAC). Why is it my favorite? Because it’s instrumental in determining whether or not your company is actually making money. In a nutshell, CAC tells you on average how much it costs your company to acquire and onboard a new client.
Let’s break down what’s actually in CAC. There are many ways to calculate it, below is the most common to get your company’s overall CAC. Some calculate only the actual acquisition costs of marketing and sales. This blog post from Ometria does a good job of laying out the calculations, though it’s more geared to e-commerce. You can also calculate it by customer segment, which is extremely valuable and I’ll explore further below.
Calculating CAC: The total cost of bringing in a new customer and getting them up and running (including implementation, training etc). Add up all these for last year and divide by the number of clients you acquired to get your average CAC.
- Total salaries of sales and marketing (or the portion of each that are dedicated to new business)
- All marketing budget associated with bringing in new clients
- Training salaries and budget associated with on boarding new clients
- Implementation, development and project management salaries and expenses associated with on boarding new clients
- Any other miscellaneous costs associated with acquiring and implementing new clients
Knowing your average CAC is important. If your average CAC is $20,000 and your average client pays you $5,000 per year, there’s a problem—you’ve got four long years before you break even, assuming your clients stay with you for four years. You either need to increase your prices or figure out how to acquire and onboard clients more cost-efficiently.
But of course averages only tell part of the story, so let me tell you a couple of simple scenarios that will illuminate CAC and why you should look as precisely at this data as you can.
Let’s pretend that you sell tax software to businesses (it’s that time of year!)
Scenario 1: You do a beautiful marketing campaign using the largest trade magazine in your industry. You spend $10,000 and land one big company that spends $100,000. Your campaign netted $90,000 in ROI. Yahoo! Mission accomplished.
Scenario 2: You do a more expensive program for $15,000 to a small group of high-wealth individuals. You land two of them who spend $10,000 each. ROI is only $5,000. Hmmmm.
You might dust your hands and say hey, the ROI tells all, right? Let’s double down on that first campaign. But you might be wrong. Here’s why.
The big company you landed in scenario one takes a lot of effort, time and resources to onboard. They are particular and need a lot of custom work to make them happy—hey they’re spending $100K, so they’re worth it, right? Maybe. By the time you have this client up and running, you have spent $100,000 in your staff’s time and resources. So now, the cost of the marketing campaign, plus the cost to onboard the big company is $110,000. Your ROI is in the red.
In contrast, the two high-wealth clients you acquired in scenario two are easy business for you. Your team is experienced with this type of client and they can get them up and running with a cost of only $2,000 each in time and resources. So the overall ROI of scenario 2 is positive, but still only slightly.
So which client do you want more?
To answer that question you might need to look at one more metric. Retention. Which of these types of segments of clients have the highest retention rate for your company? You may find that the big company gets very embedded with you after all that custom work, and they will stay, happily paying subscription fees for years to come, in which case, it’s probably worth that high upfront CAC. Or you could find they churn after a year, making it not worth your time. Meanwhile, your high-wealth individuals may be a loyal, low-maintenance type of client that stays for years as well.
You can see how this data can drive your marketing strategy—knowing which type of clients are your sweet spot, means more profit for your company. Who doesn’t want that?Photo credit: 10ch via Flickr Commons