Pyrrhus of Epirus was one of the most dynamic and innovative generals of ancient times. He won victory after victory against his enemies in Macedonia and Rome. There was just one problem with his military successes: each victory won came with such devastating losses to his own army, that he was never able to take advantage of his triumphs.
Thus, the term “Pyrrhic victory” remains with us down to this day.
In the business world, customer acquisition is an important measure of marketing success. After all, the more customers a business has, the more successful it must be, right? Unfortunately, many companies find that a single-minded focus on customer acquisition often leads to a Pyrrhic victory: more customers, yes, but also skyrocketing costs.
However, there is a vital marketing metric that can help you to avoid this pitfall, and win actual victories with your advertising: Customer Acquisition Cost (also known as CAC).
What is CAC?
Put simply, CAC can be defined as a company’s best guess as to how much it costs, in total, to acquire a new customer. This goes beyond basic advertising costs alone. For example, think of all the potential costs associated with the following areas:
- The amount of money an agency will charge as a placement fee for your ads
- The salary of your copywriters, market analysts, and sales representatives
- Payment processing fees for online purchases
- The cost of acquiring marketing equipment, tools, and software
These and other factors feed into the ultimate cost of acquiring a new customer.
Once you have wrapped your head around your company’s total spend on sales and marketing, then you have to determine (as accurately as possible) how many new customers were actually converted as a result of that investment. In other words, existing customers are not relevant to the CAC formula; only newbies should be taken into account.
Finally, you should factor in the time frame: are you calculating CAC on a daily, weekly, or monthly basis? What you’ll end up with is a relatively simple equation for CAC:
CAC = total sales and marketing costs within [insert time frame]/total number of new customers acquired within [insert the same time frame]
Other Metrics Associated with CAC
While CAC is an extremely useful metric in its own right, it becomes even more valuable when combined with other relevant marketing metrics. These include the following measurements of performance:
- LTV (Customer Lifetime Value). In simple terms, customer lifetime value is an expression of how much revenue each customer will generate for your company over a specified time period (usually measured in spans of 1, 3, or 5 years). It is closely related to, and in some cases interchangeable with, Average Revenue Per User (ARPU). LTV helps marketers to answer the question: Will this customer generate more revenue than what it costs to acquire him?
- Payback period. A payback period is a measure of cash flow. It answers the question: How soon and how frequently will I get cash from a newly acquired customer? This is a vital consideration for most businesses: the expectation of big profits 3 years from now is great, but it does nothing to keep your doors open right now.
- Churn rate. This metric tracks the percentage of your customers that leave for the competition and/or never buy from you again. It helps answer the question: Should I focus my efforts on acquiring new customers, or retaining existing ones? Research indicates that it costs up to 5 times as much money to acquire a new customer than it does to keep a current one, and ultimately you want to gain those customers that will stick with your brand for a long time.
- ROI (Return on Investment). By measuring your ROI on a channel by channel basis, and then comparing the results to the corresponding acquisition costs, you’ll find the answer to the question: Which channels should I prioritize in my marketing strategy?
These and other metrics add a ton of value to CAC, and help you to make informed, well-rounded decisions.
Why CAC Matters
CAC is a crucial component of any effective marketing strategy, especially in conjunction with the above-mentioned metrics. CAC should matter to you for at least 3 reasons:
- CAC helps you to avoid wasting your resources. CAC can help you to determine which channels are profitable, and which ones are draining your company’s resources. For instance, if your ads on social media platforms cost you $20 per customer, and each customer yields an LTV of $60, then you’re doing well. But if your content marketing only costs you $10 per customer, and each customer has an LTV of $100, then which channel should you prioritize? The answer is obvious.
- CAC helps you to focus on areas of vital need. As mentioned above, when combined with churn rate CAC can help you to decide whether retention or acquisition should be the main focus of your advertising efforts. If your CAC is low, and your churn rate is par for the course, then a focus on acquisition makes a lot of sense. On the other hand, if you have a high CAC and an above-average churn rate, and your average customer has a high LTV, then you would likely want to refine your marketing message to target current customers instead of new ones.
- CAC helps you to identify where adjustments to your marketing process should be made. When you itemize the diverse costs that feed into your total CAC, you’ll likely be able to pinpoint inefficiencies in the sales and marketing process. For example, perhaps your content delivery schedule is not keeping up with current needs, or your CRM software is creating extra work for your team members. Once you’ve identified key weaknesses, you’ll be able to address those issues one by one, and reduce overall CAC.
Customer Acquisition Cost will continue to remain an important part of marketing strategy in the years to come. If you pay close attention to CAC and its associated metrics, then you will avoid Pyrrhic victories, and enjoy sustainable business growth now and into the future.