Know your target market. Just like an athlete hearing a motivational speech, marketers hear that message daily these days. But what is the cost of winning that customer? Data-driven marketers turn to customer acquisition cost (CAC) to start talking about what is the true cost to win a customer segment.
To appreciate the value of that cost, let's look at the definition.
Defining Customer Acquisition Cost
Customer acquisition cost is the total sum of marketing costs for attracting a customer segment divided by the total sum of sales from that given segment.
It is a ratio that describes the total sales and marketing cost required to acquire a customer. The ratio offers strategic guidance to connect your marketing to customers, because it relies on all the marketing factors that account for customer acquisition, as well as the costs.
CAC vs Return on Advertising Spend (ROAS): Differing Perspectives
CAC seems similar to return on advertising spend, a metric I explained in a previous post, but it really takes it to the next level in regards to investment questions for comparing an expense to what is gained from that expense. The difference lies in what perspective the ratios are meant to address. ROAS examines sales from the perspective of specific digital ad campaigns. CAC examines revenue against the cost of acquiring that revenue from the perspective of total marketing expense. ROAS is a very specific application, digital ads, while CAC encompasses all marketing costs involved with your target audience.
The examination of marketing budget spend in a CAC analysis encourages a larger budget discussion among managers. Examining CAC forces an examination of the entire cost of the intended customer journey. When the cost of all marketing and advertising initiatives are summed up, marketing teams can discover that revenue from a market segment does not offset the expense. ;
An examination of marketing budget also triggers further debate of the resources needed to invest attracting new customers to a product or service or if a segment is worth a continued investment. Business news is replete with stories on strategic market exits. For example, LG recently announced it would exit the smartphone market, after comparing its continual losses against its standing as third in global sales behind Samsung and Apple. Its 2020 sales amounted to 2% of the global market. LG will refocus on other growing markets, such as electric vehicle components
Decisions like the LG Electronics exit introduces a comparison of CAC against customer lifetime value. Doing so places the view of customer segment sales into a long run perspective.
Managing Long-Term Customer Acquisition Costs
The adoption of apps as a way to conduct business offers another example of managing long term customer acquisition cost. Analysts can use CAC to a better determine if a given user segment that downloads a service app is becoming a profitable cohort of subscribers. Downloads may be the first mentioned metric for demonstrating adoption of an app. But a CAC can better speak to manager or investor questions regarding the quality of actual sales driven. Is customer usage of an app leading to sales activity? Combining metrics from analytic reports answers what opening campaign steps are winning customers consistently and potentially contributing to CAC.
Customer behavior has shifted in many markets due to the extensive impact COVID-19 pandemic had on retail behaviors, service delivery, and supply chain operations. Thus your marketing team must understand how your business goals have evolved in light of these changes — and if the impacts are potentially permanent — before embarking upon a customer acquisition strategy.
Related Article: A New Facebook Ad Metric Matches Spend to Cross-Channel Experiences
How Analytics Enhances CAC Analysis
Analytics is essential in developing quick assessments of progress on one customer segment over the other. The number of conversions from the given customer segment can be a deciding factor when comparing segments. How many conversion occurred within a given period. You can gather the data for each traffic source filtered according to the customer segment being sought. You can then examine how that segment compares to the total marketing used to acquire the audience segment. Developing analytic reporting that considers metrics influential to CAC can raise your awareness of how your campaign spend is increasing or decreasing value.
Marketers hear the message of attracting the right audience repeatedly, but the real debate is selecting a metric that speaks to what that attraction costs. CAC is the metric that managers need to decide which markets are low cost to win and which are better left as a loss.