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Stories of people doing business and life well. We explore what it means and what it takes to do business and life well.
I’m your host, Peter Wilson. If you’re like me, you’re intrigued by stories of common people who have achieved uncommon success in business and life. Join me as I interview fascinating people about how they got started, their successes and failures, their habits and routines, and what inspires them.
Quick question. Do you know how much it costs your business to win a new customer? If you don't know, stick around.
Emily:Well, to Don't Be Afraid of the Numbers, our mini series that breaks down one vital marketing metric each episode, so you can make data driven decisions without the dread. In our first episode, we're diving into customer acquisition costs, the single number that tells you exactly what it takes to win a new customer. So let's dive in. Peter, take it away.
Peter:Awesome. Thanks, Emily. Before we dive into the customer acquisition cost or CAC, I did want to explain why we're doing this. We know that marketing metrics and numbers in the business can be scary for a lot of business owners. And I don't mean scary in terms of like, they're afraid of the numbers, but maybe if you're not used to looking at the numbers or you don't even know where to get started, we may have an aversion to looking at them, procrastinating.
Peter:So we're just trying to take some real simple marketing concepts and sales concepts and metrics and make it very approachable. So again, today we're going to talk about customer acquisition cost, also known as CAC. It's extremely helpful because it rolls your sales, marketing, and advertising effectiveness into a single number that you can track monthly. And we like to call it a one blunt truth, right? So it's got a lot of elements in it, but it's a single number you can look at.
Peter:So it's the cost of winning AKA acquiring one new customer. Now Cactus doesn't tally up your ad dollars. It embeds both sides of the growth equation into one number. So it's looking at both your marketing and advertising efficiency. That means every dollar you pour into Google ads, Facebook, SEO, or direct mail, they're measured by how many leads they produce, right?
Peter:So if your campaigns are really targeted, you're running marketing campaigns that are really targeted, your creative is really resonating with your audience, you'll generate more qualified leads for the same spend, and you'll drive your CAC or your customer acquisition cost down. Now, other piece of the equation though, is your sales effectiveness. You know, you can generate a lot of leads and, you know, we do that for a lot of our clients and we're always looking for ways to make the cost per lead go down. Once a lead comes to your business, your sales process takes over and fast follow-up persuasive proposals and smooth onboarding boost conversion rates. So conversely, if you don't have good processes on the sales end, then that's going to negatively impact your sales effectiveness and it's going to impact your customer acquisition costs.
Peter:The bottom line is with sales effectiveness, higher close rates mean more customers per dollar spent. Again, that will lower your CAC. So here's the math. Total up your marketing spend for a period, we recommend a monthly period, and divide it by the total new customers you acquired in that same period to get your new customer acquisition costs or CAC. Once you know it, here's what you can learn.
Peter:CAC will automatically penalize wasted advertising and poor sales close rates, as I mentioned earlier. And a rising CAC flags that either your marketing isn't reaching the right people or your sales team isn't sealing the deal or both. On the other hand, if your CAC is going down, that means that your marketing and potentially your sales handoff are working well. Tracking CAC month over month gives you a holistic pulse on how effective your entire customer acquisition is, melding marketing reach with sales conversion and signals when it's time to dig into specific channels or sales steps for improvement. So let's take a look at an example.
Peter:So the first step, as we mentioned earlier, is to total up all your sales, your marketing and advertising spend for the period. So again, we're gonna use one month. I've got a little whiteboard here, so I'm gonna write out what we've got here. So in this example that we're gonna talk about, we've got this business has Google ads. They're spending $2,500 a month.
Peter:They're doing Facebook and Instagram ads. They're spending $1,500 a month on that. They're doing local print ads, like postcards and things like that. And they're spending a thousand bucks a month. And then they're doing local sponsorship banners.
Peter:So this would be something like, go to high school, you sponsor the sports programs, and a lot of businesses, a lot of local businesses that we work with like to do that. And it's a nice touch. We'll just call it local sponsorships. Say you're spending $500 a month there. And then lastly, in our example, we have, the business has a marketing agency.
Peter:That's what we knew. And obviously you're going to have to either do it yourself or pay somebody to do it. If in our example, this business is working with an agency and typically they're going to do local SEO. They're going to do email campaigns. I'll just list out a couple other things they may do.
Peter:Somebody's going to have to manage your ads. So ads management, unless you do that yourself, which we And don't then reviews management as well. Let's just say that they're spending 2,500 a month for that. So that totals up to a monthly marketing and advertising spend of $8,000 All right? And then the second step, you wanna count your new customers acquired in that same period of time.
Peter:Now I realize that you're going to spend money in one month and you're not necessarily, those may not all convert into a customer that month, but if you record this data month over month, eliminates that situation. So this is a good way to get started with the numbers. So let's just say that during the month that we're looking at with this customer, they had 40 new clients. Now, remember we're not talking leads. Okay.
Peter:They may have had 200 leads. Yeah. But we're talking new customers. So this example, they had 40 new customers. So then you just take the dollars divided by 40 and you get a $200 customer acquisition cost.
Peter:So there you go. That is the calculation. It's pretty simple. That's the beauty of it is you've got a number. What are we gonna do with the number?
Peter:The first way to use this data to see whether or not your customer acquisition cost is sustainable for your business. So your CAC should always be less than the lifetime value of a customer. So you have to know this number just so you know whether or not you're going to have a sustainable business. And there are situations where your CAC may be more than the profit from the first sale to a new customer. That's not always a bad thing if you have a business that generates repeat or ongoing revenue from a customer that drives up customer lifetime value.
Peter:A So little side note, we'll be covering how to calculate lifetime value of a customer in a future episode. So this is just a first piece of that bigger picture. So the next thing to use CAC for is detecting trends in your marketing and sales performance. CAC will naturally vary month to month just due to a number of factors. And one significant factor that can influence your CAC is, especially your trend is increased competition.
Peter:So as more players enter your market or existing players or competitors intensify their efforts in sales and marketing, that is going to drive the cost of acquiring new customers up because there's just dollars going out trying to get the same people. Another factor is seasonality. And that always plays a substantial role in CAC variations. Many businesses have peak and off peak periods. Like we work with Dell practices and there's certain times of the year where you know, the phone doesn't ring and other times where it's just ringing off the hook.
Peter:Roofing companies, same thing. So, you know, there's periods of peak and off peak that's obviously going to affect your CAC because we can't necessarily use marketing to increase demands. We can use marketing and advertising to capture demand, but we won't necessarily generate demand. So if it's off season, that means you're probably gonna have to spend more money to capture because there's just less demand out there. So identifying seasonal trends, that's gonna help you in forecast and allocate your resources more effectively in your business.
Peter:And once you start recording your CAC, you'd be surprised. The trends that you probably knew intuitively, but you hadn't seen on paper will be very obvious. Another thing that can affect your CAC and can drive the trends up and down is internal factors like training a new sales staff. So that can, you know, if you've got, you hired a bunch of new people, that can temporarily inflate your customer acquisition costs. During the onboarding period, new sales reps may have lower close rates, require more support.
Peter:That's gonna increase your cost per acquired customer. And if your salespeople gain experience and proficiency, their effectiveness is gonna go up and your CAC should ideally decrease. So tracking CAC alongside your sales team development allows for a more nuanced understanding of that performance. So by analyzing these trends, you can gain a holistic view of your marketing sales effectiveness, which internalize for informed decision making and ultimately drive sustainable growth. So CAC monthly trends, jump off the page, use a worksheet that we're going to have a link to if you'd like to easily figure out how to total all this up and get it divided out and start tracking your CAC.
Peter:We'll have a link in the show notes. You can go to bizmarketing.com/podcast, find this episode and it'll be in those notes as well.
Emily:Awesome. Yeah. I love how you just laid out that equation. It's clearly simple to do, but I don't think a lot of businesses are doing it. But how have you seen other businesses use their CAC to improve their business?
Peter:Yeah, so the place that I really ran into this concept as just a simple metric was one of our clients about ten years ago, a dental practice. They had hired a business coach who asked them to produce the CAC every month. And so we started doing it for them. And first of all, it forced us to total up the marketing spend, something that they hadn't been doing and just look at that number. So that isolates that number.
Peter:The other thing that we did was we looked at the total number of new patients that they had generated each month. Again, not something that they were actually putting on a spreadsheet. So just doing that really helped, you know, just already started to get an idea of what's going into the numbers. And we could actually look at the total marketing spend, add a marketing spend month to month and see how that buried. And then we would look at the number that generated that, you know, new paid cost per new patient.
Peter:And we saw that number generated as well. So it was very informative and helpful. I, at first I was skeptical that this would help, but what it did was it really highlighted the fact that their customer acquisition cost was actually very low. Though on the face of it, somebody would say, oh, you know, I don't wanna spend a $100, dollars 200 to get a new patient. But in the scheme of things, it was actually a very small investment and that kind of changed the mindset of the owner of the business.
Peter:And they were able to really understand the value of marketing. And since that time, that was ten years ago, they've grown significantly since then. Now there's one thing that CAC doesn't account for though. And I know you and I were talking about this earlier, it's word-of-mouth referrals, right? What word-of-mouth referrals really is more like goodwill.
Peter:So if you want to isolate word-of-mouth referrals from the numbers, what you'll want to do is you want to find out how a new customer or a new patient came to you. So you could, if you wanted to, you could calculate paid only CAC, meaning only Cal new customers if they identified one of the sources of your advertising and then a word-of-mouth referral, you just wouldn't include them in your totals. So then that would obviously increase your customer acquisition costs. I think that's overrated because I like to look at marketing as all working together. Could have been a word-of-mouth referral, but then maybe that person that was referred went online and searched for you.
Peter:Then you're out. So again, it all works together. But anyway, it was very helpful for this customer of mine, this dental practice to track these numbers. And again, we're still doing it ten years later and it's still a valuable tool that we use. We also use it just to see if we're looking, considering a new campaign or opportunity, we're looking at the number and trying to sort of figure out what our CAC might be for that channel and try to estimate if it's gonna dilute or increase CAC or it's gonna decrease CAC.
Emily:Great, so if someone's tracking their CAC and they're realizing like, it's a little bit high for me, do you have some suggestions on how business owners might be able to lower that CAC?
Peter:Sure, yeah. Look for some opportunities. You might've signed up for something years ago, like some Yelp campaign that's just not really performing. If you're not seeing Yelp mentioned by your new customers much, you might want to consider cutting back on that. And so I would always be looking for opportunities to reduce some channels that might be not as effective, like a lot of magazines that businesses sign up for, like local magazines and things.
Peter:And a lot of that is good for brand building and getting your name out there, but it may not necessarily generate new sales. Another really big one is tighten up your sales follow-up. There's a concept called speed to lead. Meaning if you get a lead, how fast do you call back? How fast do you get in touch with that customer?
Peter:How fast do you put the proposal out to them? How quickly and how effectively and how diligently do you follow-up with those new potential customers or those leads? And then one other thought is to raise your pricing. Now this goes more into the lifetime value. So that is not really going to impact your CAC per se, but it will affect the amount that you can afford to spend on acquiring a new customer if you raise your prices.
Emily:Definitely. Do you have any questions maybe that business owners could ask themselves when it comes to their CAC once they've done the calculation?
Peter:The first one is obvious. What is your CAC? Do you know your customer acquisition costs? I'll let Doc do, they just give me a blank stare. Like, we think we know it.
Peter:So first of all, figure it out. Second of all, how's your CAC trending? So if you're tracking it, great. How's it trending? Third, which is about the sustainability of your businesses, is your CAC less than the profit for your first sale to a customer?
Peter:And if not, how does your compare to your lifetime value? And then how does your CAC compare to your industry averages? Now that might be a little more difficult to ascertain, but there are industry associations trade, and you can even ask an AI, ChatGPT for some industry averages. I'm shocked at some of the data that I've been able to locate just by using ChatGPT. Lastly, do you sense any obvious opportunities to improve your CAC like phone training for your front desk?
Peter:Those are some of the things that I think about. So to get started with CAC, we have a free CAC tracker sheet and that'll be available in, on our website, bizmarketing.com/podcast. So it's bizmarketingbizmarketing.com/podcast. We'll have the links in there. And then if you're interested in just chatting with us about CAC and how we might be able to help you track that and help you with your marketing, please go to our website and book a session with us.
Peter:There's this big red button at the top of our website. Just click on that and you will book a session with us and we'll explore your customer acquisition costs and other elements of your marketing and help you get that sorted out.
Emily:Great, awesome. Thanks Peter. I appreciate all of the information and a lot of detail. We're looking forward to this mini series, Don't Be Afraid of the Numbers. Our next marketing metric, as Peter mentioned, is lifetime value.
Emily:It's kind of the other side of the coin, so make sure you subscribe to the Field Guide Podcast by Biz Marketing so you don't miss it, and we'll see you then. Looking forward to it.
Peter:Awesome. Thanks, Emily.