Customer Acquisition Cost: Is Your Business Off Balance?

Posted on May 21, 2013

Picture this: You are a start-up and have an amazing idea that is going to disrupt the way the world currently works. Maybe you are a small business, or just looking to make a quick buck. Maybe you’re a seasoned entrepreneur, a businessman or woman who worked in an industry for a decade, a developer, or maybe you are just getting out of college and looking to tackle start-up life. You assemble a great team and find the best market to create a product/market balance and then you execute on your business model.

A few months pass and you have some traction but not an extravagant amount. Your funding is running out, and you are eating ramen noodles for every meal and working a few side jobs to make ends meet. You are probably wondering what happened or maybe discovering that something feels wrong. You might ask yourself if you’re on a sinking ship. You start looking for ways to increase you conversions through marketing. “Should I create a Facebook Page? Twitter? Maybe a Linkedin Profile? Should I start cold calling, sign up for conventions, or network a crazy amount to find referrals?”

No matter what path you take, you might already have a case of the Silent Killer: Customer Acquisition Cost (CAC). David Skok explains CAC as the “second biggest cause of startup failure” preceded only by product/market fit. If you are a CMO, or an agency you should be tracking CAC for you and your clients if you want to stay afloat.

EmailCAC

Why?

If you are looking for what metrics to track in a campaign, don’t fool yourself into thinking that vanity metrics—such as number of likes, follows, retweets, and favorites—are the most important thing. The truth is they don’t have a great correlation with what everyone wants: a great ROI. When you focus on CAC as your main metric for marketing, it can mean a world of difference in measuring impact on your customer segments. Why? Because it gives you a holistic view of your marketing efforts in terms of cost, impact, and conversions. It dictates and forces you to think about things such as:

*Am I optimizing my sales/marketing models to meet the needs of my customer?
*Cost per lead
*Conversion rates at each stage of your sales process
*Lowest level of touch needed

CAC is the cost of your efforts in Sales and Marketing. As human touch increases, usually so will your CAC. You don’t have to be a rocket scientist to understand that if your CAC is larger than the LTV (Lifetime value of customer) you are probably sinking.

How?

The next step is to ask yourself “How do I figure out my CAC?” The way that HubSpot suggests to calculate CAC is quite simple:

Total Sales and Marketing Cost
Number of New Customers

These costs are, but not limited to, advertising, salary/commissions/bonuses, and overhead. You might be shocked at how high your current CAC is, but that is fine because you can begin to rebuild your process to lower it. Remember that “fear makes you focus.”

What?

After doing the calculation, analyze your results, don’t ignore that number despite the thoughts that you are having (ex: “This can’t be right”). CAC is meant to be more of a “ballpark“ figure, and may vary depending on your business model. If your CAC is not lower than your LTV, here are a few tips to getting back on track:

Revisit your sales/marketing model

The crux of the matter is that you are probably not optimizing your business in sales/marketing funnels well enough. Map out the processes that your customer segments go through to purchase (or not purchase) your services/products. This means going out there and conducting interviews. “GET OUT OF THE BUILDING”

Implement some Inbound Marketing

Some of your pain points probably exist because you aren’t taking advantage of tools to increase you online presence. Establish your brand through a blog, social channels, and optimize your website to gather leads. Yes, it takes time and money to do this, but the pain and effort you put in now will create better growth for the future.

Measure

Keep track of both how and how many leads you generate , and obviously track how your new strategy is impacting your CAC.

The most important takeaway: DON’T IGNORE YOUR CAC. Hopefully through reading this post, the process of analyzing your decisions in sales/marketing will become a habit which will lead you to research better marketing practices. Now go out and build, build, build!