CAC: Effective advertising..Changing fate

September 3, 2018
September 3, 2018 Chandrabhan Singh

Customer acquisition cost (CAC) is a metric that has been growing in use, along with the emergence of Internet companies and web-based advertising campaigns that can be tracked. CAC, as you probably know, is the cost of convincing a potential customer to buy a product or service. It’s an improvement form the traditional form of advertising (which we cut our teeth in brand marketing career) where we would do the media planning basis our reach objectives & consumer profile..

a. TRP of particular show on TV

b. Circulation numbers

c. NRS numbers

..and find methods to track consumers through the decision-making process.

Today, many web-based companies can engage in highly targeted campaigns and track consumers as they progress from interested leads to long-lasting loyal customers. In this environment, the CAC metric is used by companies to see the effectiveness and also look at overall budget allocation.. specifically for companies with Online and Offline presence.

CAC is a very useful tool for marketers for allocation basis effectiveness. I have used it to optimize the return on advertising investments. In other words, if the costs to extract money from customers can be reduced, the company’s profit margin improves and it makes a larger profit and serves the shareholder interest. The boards are more interested in providing the company with the resources it needs, partners are more committed to growth, and the company can use the improved profit margins to pass the value to its customers for a greater market position.

How to calculate CAC

Dividing the total costs associated with acquisition by total new customers, within a specific time period

The simple method for working out CAC

CAC= MCC/CA

Where:

CAC = Cost of customer acquisition

MCC = Total marketing campaign costs related to acquisition (Not retention)

CA = Total customers acquired

For example, if a company spent Rs1000 on marketing in a year and acquired 1000 customers in the same year, their CAC is Rs1.00. There are caveats about using this metric that you should be aware of when applying it. For instance, a company may have made investments on marketing in a new region or early stage SEO that it does not expect to see results from until a later period. While these instances are rare, it may cloud the relationship when calculating the CAC. I suggest that you perform multiple variations to account for these situations. However, we will provide some examples of calculating the CAC metric in its most pragmatic and simple form with two examples. The first company (Example 1) has a poor metric.

Example 1: A fashion merchandise company.. Blue swan

If Blue swan has a CAC of Rs10, the management team will be delighted when looking at the year’s financial statements.

However, in the case of this company, the average order placed by customers is Rs25 and it has a markup of 100% on all products. This means that on average, the company makes Rs12.50 per sale and generates Rs2.50 from each customer to pay for salaries, webhosting, office space, and other general expenses. While this is the quick and dirty calculation, what happens if customers make more than one purchase over their lifetime? What if they completely stop shopping at brick and mortar grocery stores and buy from only this company?

The purpose of customer lifetime value (CLV) is specifically designed to resolve this. You can find a CLV calculator by simply searching in your favorite search engine. In general, this metric helps you form a more accurate understanding of what the customer acquisition cost means to your company.

A Rs10.00 customer acquisition cost may be quite low if customers make a Rs25.00 purchase every week for 20 years!

The complex (correct) method for calculating CAC:

CAC= (MCC+W+S+PS+O)/CA

Where:

CAC = Cost of customer acquisition

MCC = Total marketing campaign costs related to acquisition (Not retention)

W = Wages associated with marketing and sales

S = The cost of all marketing and sales software (Inc ecommerce platform, Automated marketing, A/B Testing, Analytics etc)

PS = Any additional services used in marketing/Sales (Designers,Consultants etc)

O = Other overheads related to marketing and sales.

CA = Total customers acquired

What About CAC Per Marketing Channel?

Knowing the CAC for each of your marketing channels is what most marketers want to know. If you know which channels have the lowest CAC, you know where to double down on your marketing spend. The more you can allocate your marketing budget into lower CAC channels, the more customers you can obtain for a fixed budget amount.

The simple approach is to break out your excelsheet and gather all your marketing spends for the year, quarter or month and add up those amounts by channel. For example, how much did you spend on Google Adwords and Facebook advertising? In this case you might put this in a column called “PPC” or “Pay-Per-Click”. How much did you spend on SEO and blogging? This might go into a column called “Inbound Marketing Costs”.

Now that you know how much you spent on each channel, you can apply a simplistic formula and assume each channel “worked” to get the same amount of customers as the next channel. This would be an averaging method. The only issue is that it can be difficult to know what channel is responsible for which customers.

You can easily see where this approach becomes futile. Say you only ran one Pay-Per-Click advertisement on one day – just as a test. You spent Rs10 total and that’s all. When you look at your spends, it will appear Pay-Per-Click would be the best marketing channel because of its extremely low CAC. It would be unwise to double down on Pay-Per-Click, because you know you really didn’t utilize it all for that period of time.

For e-comm companies that sell physical products, it’s easy to know what Pay-Per-Click advertisements lead to direct sales because of the conversion tracking the advertising platform provides. In this case you can determine that value. This will give you a better idea of how your Pay-Per-Click campaigns are doing relative to the rest of your marketing spend.

Also, with tools like customer analytics you can trace paying customers back to their “last touch” attribution source. This means you can see the last channel the customer visited before doing their first sales with your online business. For example, if a customer came from an organic search result, you would know that SEO would be responsible for that customer acquisition.

Now this is where marketing gets philosophical :).

One school of thought is that each marketing channel supports the next channel – it’s a combined effort. Your blog posts reinforce your Pay-Per-Click ads, and all channels work together to bring in customers. This is a common notion in outdoor advertising. Hoarding reinforce T.V. campaigns, which reinforce Print/Radio and so on. Ultimately it comes down to Ceo philosophy on how to attribute customer acquisition. If you feel that last touch is “good enough” you can use that model for your CAC calculations.

The reality is that our advertising campaigns can always be more effective, customer loyalty can always be improved, and more value can always be extracted from consumers. There are several methods your business can use to improve its CAC in its industry:

  • Improve on-site conversion metrics: One may set up goals on Google Analytics and perform A/B split testing with new checkout systems in order to reduce shopping cart abandonment rate and improve the landing page, site speed, mobile optimization, and other factors to enhance overall site performance.
  • Enhance user value: By the highly conceptual notion of “user value,” we mean the ability to generate something pleasing to the users. This may be additional feature enhancements/qualities that consumers have expressed interest in. It may be implementing something to improve the existing product for greater positioning, or developing new ways to make money from existing customers.
  • Implementing a Good CRM/Loyalty program : Think of Amazon prime & TRR. The terminal retention rate is an indicator of the steady-state engagement of the users with the product. Amazon Prime is a paid subscription service offered by Amazon.com that gives users access to free one-day delivery, streaming video/music and other benefits for a fee. Since users have already paid for the subscription they tend to come back more often than the regular customers of Amazon. The TRR for Amazon Prime is estimated to be twice as much as the Amazon.com users(Source: Amazon annual report).The greater the TRR the higher the likelihood of success of the internet business. Businesses with very low TRRs have issues retaining the customers they acquire, requiring them to continuously and (often) expensively keep re-acquiring customers

It’s all about retention, stupid!

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