Knowledge Exchange is a weekly series of educational articles that we encourage you to share and discuss with your colleagues and network. This month, we’re offering advice for successfully marketing your services.
It’s expensive to market a business. But it can be even more so if you’re not sure how to accurately calculate what you’re spending to bring in new customers.
Let’s look at what customer acquisition cost entails and how to lower it by solving some common challenges your business might be facing.
Customer Acquisition Cost (CAC), as the name suggests, is the total cost associated with acquiring a net-new customer. It’s a key business metric that’s calculated by summing up all of your marketing and sales costs over a period of time (e.g., one quarter) and dividing by the total number of new customers acquired within that same period.
The CAC formula generally includes standard costs such as:
It's important to also include the costs of tools and technology, such as software for advertising, marketing automation, CRM and sales pipeline management, email and communications and quote or proposal development.
➡️ There are various methods for calculating CAC, including fully loaded CAC and paid CAC.
The goal is to lower CAC over time while retaining a steady pipeline of quality leads and increasing conversion rates through each stage of the funnel. A decrease in CAC over time means that your marketing and sales team efficiency is improving — you’re either acquiring and converting a greater volume of customers or reducing marketing and sales expenses. Thus, CAC is often used as a standard measure of business health and profitability.
While most businesses have goals around being more cost-efficient, there are many factors that can get in the way. For example, advertising costs soared post-pandemic because of high demand from increased competition and a low supply of advertising placements available. We’re seeing another adjustment now as the world prepares for a turning economy. Many are cutting back on marketing spend and focusing attention on more efficient programs and campaigns.
Regardless of the circumstances you can’t control, the fight for prospective customers’ attention always comes down to lowering CAC.
Yet, as you may have already discovered, that’s easier said than done. Justin Rowe, Founder and CMO at Impactable, describes the problem: “Acquisition costs have so many factors associated with them that it can be hard to unravel and assess properly.”
One way to make this less confusing is to divide CAC into two categories: acquisition and conversion. Here, we’ll cover the first.
READ NEXT: Customer Acquisition Cost Part II: Converting Leads Into Customers
At the top of the funnel, in the acquisition phase, costs are relatively straightforward. They include all of the time, effort and dollars you spend to increase brand awareness and generate demand for your services.
We’ll cover four common challenges you might encounter as you implement a customer acquisition strategy.
CHALLENGE #1: You’re not sure which marketing channels are worth the money.
SOLUTION: Develop a framework for testing and experimenting with new channels, or use an existing method such as the Bullseye Framework, developed by Gabriel Weinberg, CEO and Founder of DuckDuckGo and author of Traction. The Bullseye Framework lets you pinpoint the most potentially successful channels, lowering your CAC and increasing your return.
According to Weinberg, most businesses will gain 70% of their traction from a single channel. After testing and interpreting your results, double down on the most promising channels and cut back on those that didn’t move you toward your lead volume goal or generated a higher cost per lead than expected.
NOTE: To properly attribute leads back to a given channel, you need to track them. You might add UTM parameters within a URL, build a dedicated landing page for a campaign, create a unique code or coupon for new customers or include a question on signup forms to ask how leads heard about you.
“Look at marketing as an ecosystem. Retargeting the prospect across two to three platforms beyond your original one will ensure the distribution of key assets that convert traffic at a higher rate. So, the acquisition cost is much lower as you increase the efficiency of your ad spend.”
Justin Rowe, Founder and CMO, Impactable
CHALLENGE #2: You don’t have a marketing expert on staff.
SOLUTION: If you’re feeling overwhelmed by trying to lower CAC while dealing with a skill gap, there are a few simple solutions.
CHALLENGE #3: Your advertising efforts aren’t attracting your ideal customer.
SOLUTION: Nothing raises CAC like spending money to attract the wrong people. The answer is careful segmentation.
When selecting a target audience for your ads, start with what you already know about your ideal customers. What are their characteristics and demographic traits? What do they do? What do they buy? What do they care about? What do they watch? Who are they influenced by? And where do they spend their time?
Many marketers forget to exclude audiences they don’t want to advertise to. You probably don’t want to spend ad budget showing your ad to your existing customers, recently churned customers, unqualified contacts, employees and competitors.
TIP: If you’re in B2B, LinkedIn has, by far, the most powerful capabilities for targeting other businesses based on firmographic details such as their industry, geography and business size. You can also target individuals by job title or function. If you’re in B2C, consider social communities or platforms your audience may frequent. Meta, TikTok, Twitter, Pinterest, Reddit, Quora and Dribbble are just a few of the advertising channels which can get your business in front of your ideal target audience.
Andrew Breen, Founder and CEO of Outshine, shares his advice about advertising basics:
CHALLENGE #4: Your team is overwhelmed by shifting algorithms and new features.
SOLUTION: First, come to terms with the fact that change is inevitable in marketing tech. Realistically, if platforms like Google never changed the way their advertising algorithms and web crawlers operated, marketers would quickly figure out ways to make the platforms work in their favor, which would make things even more difficult for businesses like yours. The challenge is to adapt so you can remain competitive in the long run.
Being an early adopter of new trends and technologies is the only way to stay ahead of the curve. The executives who set marketing budgets will thank you when you’re able to save them money by not only riding the wave on the way up but reducing spend on channels that are becoming less relevant or efficient.
EXAMPLE: Recent AI trends, such as the seamless integration of ChatGPT into Microsoft’s Bing platform, is the perfect example of how a simple concept like “search” is drastically evolving. Google’s introduction of Bard, which will be ingrained into the many Google products within their suite soon, is a quick response to Bing’s ChatGPT integration. In a world where search engine results pages (SERPs) are prioritizing results driven by AI, SEO and paid search campaigns will shift. Keep up with the news about trends like this!
Next, we’ll cover challenges and solutions related to the second key part of CAC: the cost of converting leads into customers. Click here to read Part II.
While many leaders are quick to think of reducing employee headcount, cutting advertising budgets or transitioning to cheaper software solutions as the only ways to lower CAC, it’s more important to maximize efficiency in marketing and sales.
Make sure you’re using Accelo to the fullest to identify optimization opportunities in all corners of your business that impact CAC. Our Expert Services program can help you customize your usage of the platform.
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