Why is your customer acquisition cost so high?

Growth is the most basic pursuit of marketers, and the best marketing management in the world is to help companies achieve long-term development. Yet marketers seem to periodically pursue growth at any cost, ignoring the importance of long-term development.

Customer acquisition cost is a key indicator for evaluating whether growth is sustainable in the long term. This article will conduct an in-depth analysis of this issue:

Under what circumstances should customer acquisition costs be considered?

Imagine that you are about to enter the peak marketing season of the year and you begin to evaluate the effectiveness of the ads you have placed in the market. With each ad placement generating ten customers, you might think that all three ads are equal and that you should split your budget evenly.

In fact, this approach is completely counterproductive. Customer acquisition numbers are a highly imprecise tool for calibrating and scaling a company’s growth. If you want to scale in a sustainably profitable way, you should consider the following statistics:

• Customer acquisition cost
• Lifetime Value
• Payback period

Going back to these three ad slots, they all generate the same number of customers. But if you calculate the cost per click, this data becomes:

All three ads bought 100 clicks, but each ad only cost $5, so the total cost was $500 to complete the work that would have cost $1,000 and $2,000. What this information tells us is that cost per action, as a key factor, can help us better understand advertising effectiveness.

Advertising expenses are only part of the cost of acquiring customers. Others include: labor costs of marketing and sales staff; and additional costs for creativity and content production. You need to bear the operating costs as customers move around the company's various departments. All of these factors should be factored into your customer acquisition cost.

All of this data is in different data sources at different times, which means you need to calculate it in two ways: daily, weekly, and monthly, you will use your marketing tools to optimize customer acquisition costs and customer acquisition volume; monthly, quarterly, and yearly, you will review more comprehensive customer acquisition cost data with your marketing, sales, and finance departments.

A better way to use CAC: pair it with LTV

But on the other hand, cost is not a bad thing if you take into account customer lifetime value. Growing business, business is just one of the investments. Some of it is sensible, some of it is meaningless.

With customer lifetime value, you can calculate the revenue you get from any customer over a certain period of time.

Most businesses typically use 1-year, 3-year, and 5-year LTV calculations. If it is a startup company, you can design some models such as subscription renewal rate and repurchase rate.

LTV is not taken seriously in a young business or digital enterprise without a lot of historical data, but it is definitely a key metric that can be used to supplement the company's understanding of costs and improve the maturity of business decisions.

LTV combined with CAC can answer whether acquired customers contribute more revenue than they cost.

If we introduce the scenario at the beginning, we can see that although Ad 1 initially had a clear advantage in terms of customer cost, Ad 2 was a better marketing channel over time.

Understanding LTV/CAC often helps marketers unlock additional spend for their programs.

For example, it can help you determine whether you should be allowed to spend more money to acquire larger customers who are likely to stay with the business longer and pay more. The maximum amount your CAC allows can be increased as your LTV increases.

This is what “Allowed CAC” stands for. Your allowed CAC is the maximum acceptable amount to pay for a customer. This is essentially a cap that we negotiated upfront with our finance team. If your LTV is higher, you can justify a higher allowable CAC.

In addition, LTV combined with CAC can also evaluate other indicators, such as:

Channel-level metrics

• By Marketing Channel: What is the profitability of our advertising channels and affiliate advertising?
• By Marketing Platform: What is the profitability of Google Ads and Facebook Ads?
• By activity: What is the profitability of Google non-brand advertising and Google brand advertising?
• By keyword: How profitable are the search keywords I’m bidding on?

Department-level indicators

• By size: Profitability comparison of mid-market customers versus large enterprise customers.
• By region: Brazilian customers and French customers are more profitable.

This kind of comparison is endless. If every comparison requires the enterprise to carry out micro-optimization, it will greatly waste the enterprise's energy. Therefore, it is generally recommended that enterprises only compare ten key dimensions, or only focus on those large businesses.

We can think about CAC from this perspective. Most marketers think that analyzing LTV and CAC is enough. But this actually leaves out a major variable: payback period.

Payback period is the rate at which you get cash back from your customers; this determines how quickly you can make your next round of investment and should be factored into your CAC.

Payback period is important because in a well-run business, cash flow is important and money today will allow you to expand and grow faster than money 5 years from now.

How to use CAC to guide marketing strategy?

Startups often promote through a single strategy or channel (such as event marketing).

This makes calculating customer acquisition costs simple and straightforward. However, as your business becomes more complex, you have more channels and more methods.

At this time, you will often adopt multiple strategies to form an overall marketing strategy combination.

Some strategies have low CAC (like premium blogs), and some channels have high CAC (like bidding on Google searches). By understanding CAC at the channel level, you can combine and balance your budget according to business needs.

Source: Chuanglue Technology