How effective are your company’s marketing strategies?
If you’re like most B2B businesses, you likely track a variety of vanity metrics to determine the success of your marketing campaigns. From website visitors to the number of leads generated, these numbers can be helpful when it comes to monitoring your company’s growth.
A good measure of efficacy is your Customer Acquisition Costs (CACs); the idea being that lower CAC = more customers for less spend = additional ROI.
In this guide, we’re going to cover how to calculate customer acquisition costs, why CAC matters for your business, and how to reduce your CACs in order to see the greatest ROI from your marketing.
Customer Acquisition Cost [CAC] Defined
Customer acquisition cost refers to the total (yet often approximate) cost of acquiring a new customer. It generally involves calculating your overall marketing costs, the salary of your marketers, the costs of your salespeople, etc., and dividing this sum by the number of customers acquired.
Companies can find calculating CAC to be helpful because it helps organizations determine which of their marketing campaigns are most cost-effective. Having a low CAC means fewer marketing dollars are being spent to acquire each new customer.
How to Calculate Customer Acquisition Cost
CAC can be calculated by dividing all the costs spent on acquiring more customers (marketing, lead generation, ads, etc.) by the number of customers acquired in this same period. For example, if your company spent $1000 on marketing in one month and acquired 100 customers, your CAC is $10.00.
Once you know how to calculate CAC, you can compare CACs across various marketing channels and campaigns to see which are resulting in more customers for the lowest marketing spend.
For example, if you are spending $100 per month on paid ads and $1000 per month on social media marketing, and each channel is resulting in 3 new customers per month ( CAC=$33 and CAC=$333, respectively), you’ll be able to determine which channel is yielding the best results (in this case, paid ads).
Note that a “blended” CAC (combining ad spend plus paid and organic marketing) is often a better calculation because it considers the entire funnel, not just a specific campaign. However, we can further analyze CAC by channel, as well as paid branded vs non-branded campaigns, to determine which channels are performing the best.
What is a “Good” Customer Acquisition Cost?
Alas, there is no standard yardstick for determining a “good” or “bad” CAC, as the average CAC can vary widely by industry. The best way to determine whether your existing CACs may be “bad” is to compare them to the averages in your industry while considering the lifetime value of your customer.
Note that over time you will learn to set your own benchmarks and analyze how your CACs for your newest campaigns compare to those of previous campaigns. You can set goals to reduce your CACs based on past performance and try to “beat the mean” by applying new strategies.
Average CAC by Industry in 2020
As stated, what qualifies as a “good” CAC largely depends on the industry. Therefore, it is helpful to examine the latest industry CAC numbers for the current year so you can see how your business measures up. Just know that all of these numbers should be seen as an average only and that the best metrics for comparison are your own companies past performance numbers.
|Industry||Average Organic CAC||Average Inorganic CAC|
|eCommerce / Retail||$87||$81|
|Manufacturing & Distribution||$662||$905|
Why CAC Matters for B2B and Tech Companies
CAC matters for your business because:
- It shows your marketing ROI
- It determines the effectiveness of your existing marketing strategies and channels
- It can help you improve your product or service
- It can help you manage your expenses more efficiently
Each expense you have ties in with your CAC and therefore plays a role in the health of your business model. By staying on top of your expenses and corresponding CACs, you’ll have a better idea of where to put focus on your marketing efforts.
Measuring the Metric That Matter Most — LTV:CAC
Lifetime value (LTV) per customer is another important metric in helping businesses analyze their acquisition strategy and estimate their overall marketing costs. LTV is essentially the projected revenue that customer will generate for your company across their lifetime.
Why is Calculating LTV:CAC Important?
The ratio of LTV:CAC is the best metric for determining ROI. This ratio compares the value of a customer over their lifetime, compared to the cost of acquiring them as a customer. For B2B businesses, this may be even more important than cost per lead, cost per opportunity, etc.
The challenge of CAC is spending the right amount to attract new customers without jeopardizing your LTV and revenue generated from that customer. LTV:CAC can vary wildly by company stage, revenue, growth goals, and overall growth strategy (Sales-Led, Product-Led, Buyer-Led). We have customers with a LTV:CAC ratio of 8X all the way up to 30X.
What is Your Marketing Payback Period?
Marketing Payback Period (how long it takes to get your money back) is another critical metric that can inform your blended marketing strategy and can be used in conjunction with LTV:CAC. We use this metric to help our customers understand how long it takes to get their ad spend back from their campaigns.
Unfortunately, we see agencies that hide terrible marketing payback periods by blending it together with their existing brand awareness, with some payback periods that exceed 30 years on some campaigns!
4 Ways to Reduce Customer Acquisition Costs
If you’re seeing a CAC that’s far above your company’s target CAC, then you can use the following strategies to reduce your customer acquisition costs:
1. Improve Your Conversion Rates.
Your CAC will decrease if you are able to convert more customers on your marketing campaigns. To increase your conversion rates, you’ll want to adopt data-informed Conversion Rate Optimization (CRO) tactics. These include:
- Creating themed Google Ads groups to target the right keywords for your particular audience and increase the chances of users clicking on your ads.
- Adding negative keywords to your Google Ads campaigns to weed out those users who are unlikely to convert.
- A/B testing your ad copy for maximum results.
- Creating buyer-centric landing pages that appeal to your target customer and entice them to take action.
- Improving your conversion rate across the entire funnel, not just website but lead hand off optimization all the way to closing the customer.
2. Improve Customer Retention.
Again, we know that LTV is important when it comes to determining the effectiveness of your marketing. The longer you can keep a customer, the more revenue they will generate for your business. The costs of obtaining a customer are usually higher than the costs of keeping an existing one. By focusing on customer retention, you can keep your CACs low.
Do a deep analysis of customer churn to see where customers may be dropping off. What can you do to prevent this? What might entice customers to stay on for the long-term?
3. Optimize Your Pricing.
You might consider optimizing your pricing strategy in order to gain cash up front to recover your CAC. For example, you can require mandatory integration costs, training, or consulting to ensure you are making a profit ASAP.
If your costs to acquire a customer are higher than your LTV, your business will not be viable. Consider adopting a value based pricing model to collect more money upfront and effectively cover your CAC so you don’t end up “in the hole”.
4. Realign Your Digital Marketing Strategy.
Here’s the reality for most marketing organizations: over time, LTV:CAC and CAC can get out of control. This happens because year after year, paid channels continually go up in cost and become harder to make more effective.
Most B2B SaaS companies tackle this by hiring new agencies and seek to make “Better ads, better content, new designs”. These marginal changes impact revenue at less than 1% - 2% and don’t dramatically improve your LTV:CAC ratio.
If this is a problem, we encourage you to take a look at a buyer-centric approach that shifts your marketing from product-driven ads and content to narrative-driven ads and content that gives rise to your buyers’ needs.
Our customers are currently 3x - 10x their inbound volume without increasing ad spend when they make these shifts by focusing on creating awareness within their target market in a way that creates urgency.
Once you’ve managed this, you can focus less on LTV:CAC calculations and start focusing on increasing your natural growth rate — which, in the end, is all that really matters.
How the Typical B2B SaaS Demand Generation Process Drives Up CAC
The typical demand generation process in B2B is primarily optimized for “leads”. We see content like gated eBooks, white papers, and webinars that serve as the primary touchpoints in the funnel in hopes of converting passive users into raving buyers.
Then, users are usually enrolled in an email nurturing sequence and written off as an MQL. With enough lead magnet downloads, the marketing team hits their magic number and pats themselves on the back.
But once the sales team starts reaching out, this is where companies hit a snag. Often, these “leads” haven’t signaled any real buying intent and the sales team ends up wasting their time on people who are unlikely to buy. This results in higher CAC and more frustration.
If you’re tired of wasting time, money, and resources on “leads” that don’t seem to turn into paying customers, it’s time to try something different.
Adopt a More Efficient & Effective Acquisition Strategy
At Elevate Demand, we help B2B businesses like yours provide REAL value to customers so you can keep your CACs low and your revenue numbers high. Ultimately, we help you drive up the real number that matters: your growth rate.
This process starts with giving your customers the information they are looking for. We work to build trust and initiate the process of product consideration. The result is your marketing creating real demand among customers who will be itching to buy from you.
Here’s where to start:
- Win over as much existing demand as possible through paid search and competitor campaigns. This will drive immediate revenue.
- Next, optimize your Sales process to win over as much of this business as possible.
- Outshine your competitors by finding your narrative positioning that will dramatically increase brand awareness and create urgency.
- Distribute this content through awareness channels with no immediate sales ask or sales intent.
- Let your target market consume your content and let the customers come to you.
It’s all about focusing on the metrics that matter most. For evidence that this works, you can see how we increased revenue for 3 SaaS companies who were previously struggling to move the needle with their marketing.
Let’s build a revenue engine for your business. Learn more about our exact customer acquisition framework by booking a discovery call with us today.