CAC or Customer Acquisition Cost
Numbers, numbers, numbers. Numbers can be boring, dull, confusing, or illuminating, informative and exciting. Much depends on your interest in them, what they mean, but most importantly, how you find them, use them and compare them.
Yeah, compare numbers. There are cost groups, or management groups, where people meet in person or online and compare their business performance with their peers. To some such meetings are dull, but to others, it’s a fantastic learning opportunity to share your business performance and management techniques with others, face some scrutiny and criticism, but also to learn new ideas and techniques from others. It’s a give and get situation, and it can be a lot of fun making new friends while everyone shares and learns. Comparing performance usually breaks down to comparing numbers, which then opens the doors to how your business operates which ends up generating those numbers. While there are specialists who deal in production numbers, or accounting numbers such as profit and loss statements, I’m going to stay in my wheelhouse of marketing and carry on with my marketing KPI series. This article will focus on…
CAC
CAC stands for: Customer Acquisition Cost. The simplest explanation of customer acquisition cost is: How much did you spend to generate a sale from a customer?
Again, we need to establish some ground rules and define certain boundaries. For this article, we need to establish a definition of exactly who or what type of customer we are going to discuss.
Normally, a customer is someone who comes into our stores and purchases our services. But, for this article, I’m going to be discussing the cost of acquiring A NEW CUSTOMER, someone who has never been in your store purchasing your services before.
Plus, we should also define what we mean by costs to acquire a customer. Costs can be very broad and include wages of marketing/sales staff going out knocking on doors to sell our services, the cost printing and delivering postcards, expenses of a camera, camera crew, actors, video editing to produce a TikTok video, Facebook reel or YouTube video. It could include the cost or a marketing company designing print pieces, web pages, or creating content for social media posts. It might even include the cost of radio ads, TV ads, newspaper ads, Facebook ads cost per impression or the gross dollars spent on a Google ad. For simple argument sake in tis article, cost will refer to the total expense you incur creating any ad that you put out there to attract a new customer into your store.
Example One:
You prepare a postcard that is sent to 5,000 households near your store. The postcard goes to everyone within five miles of your store, which includes current active customers as well as those prospective customers who have never used your services before. You spend $1.00 per postcard on printing and distribution. Your postcard triggers a 2% response rate meaning 100 orders were generated from the postcard campaign. Of those 100 orders, 80 orders were from customers you already had in your customer database in your point-of-sale system and had done some business with previously in some form. 20 people who responded with an order were new, first time customers whom you had never done business with before.
The math:
5,000 postcards and delivery at $1.00 each cost $5,000. 20 new customers were generated or acquired from this marketing campaign. $5,000 divided by 20 new customers equals a Cost Acquisition Cost of $250.00 for each new customer acquired.
Example Two:
You prepare a Google ad to promote your pickup and delivery or route service. You target customers who are currently not signed up for pick up and delivery services, and most likely the only people responding to the ad would be folks who are not currently using route or pick up and delivery service. You budget and spend $250.00 a month on Google Ads which generates 15 new customers added to your route.
The math:
$250.00 on google ads divided by 15 routes sign up customers, your Cost of acquiring a route customer is $16.66
Compare:
The postcard campaign generated a CAC of $250.00, while the Google Ad campaign generated a CAC of $16.00
Already we can see some interesting numbers developing.
First off, we can see that a postcard direct mail campaign generated more new customers, but at a much higher CAC.
Second, we can determine that online ads are a much lower CAC than direct mail and your ad dollar goes a lot further with online ads. If you reallocate your direct mail budget ($5,000) to online google ads, you could generate more customers for the same money.
Comparing medium for ad delivery, one can see certain financial and new customer generation advantages evolving from analyzing costs and results.
But, what if you compared your postcard campaign costs to another cleaner in another (non-competing market)? What if he was getting a better response rate with his postcards than you were? Is it the offer he is making that is generating better responses, or is it because he has a smaller market share? Is it because he has lower prices, higher priced competitors? Maybe his customers earn more money and have more disposable income to spend on drycleaning? If all attributes were equal, and his postcard campaign CAC was higher or lower than yours, you can ask a lot of questions and draw a lot of conclusions.
Same with the Google Ad campaign. What might be causing one online ad to perform better, or worse? Is it the targeting? The competition? The offer, your offer, their offer, or their competitor’s offer?
What can you change to lower your CAC? What medium performs better, worse, same and at what performance? Does posting on social media for ‘free’ generate more new customers than a Google Ad? Does a $1,200 a month marketing fee with a consultant or ad service generate what CAC? How does the CAC compare to doing it in house yourself?
Numbers, numbers, numbers. I bet don’t seem so boring and dull now.
Part three continues next month…
