Are You Paying Too Much for New Customers?

Understanding your CAC — customer acquisition costs — and how it compares to the rest of the industry is the first step to getting more bang for your marketing buck

Every new customer starts as a debt, and that debt is your customer acquisition cost or CAC. This is the price in marketing and administration time that your brand invests to attract a single new customer. It’s also the bare minimum you need to make back in customer lifetime value (LTV) to generate a positive marketing return on investment (ROI).

The numbers are different for every business and every industry, but understanding these baseline costs and how to affect them is the first step to increasing marketing ROI.

Why CAC is important

The average brand spends about 10.5% of its total revenue on marketing. That includes both acquisition and retention spending, but CAC is usually a large portion of the overall spend. It costs more to recruit new customers than it does to retain old ones, but those new customers are the pumping heart of your business. Without new customers, not only can you not grow, natural attrition quickly starts to eat away at existing revenue.

Obviously, if you could spend less to generate new customers, you’d increase your overall profits. Perhaps more importantly, though, CAC allows you to calculate how much each new customer must spend with you to yield a positive ROI. That has a huge competitive impact because companies that spend less to acquire new customers can turn a profit more quickly, and perhaps reduce costs to gain a competitive advantage.

The average CAC by industry

CAC is a powerful metric, but it varies widely by company and industry. While it’s tempting to look at average numbers for your industry and try to get your CAC under them, that may be short-sighted.

There are many strategic considerations that justify a higher spend. If your brand has great customer loyalty, that can lead to higher LTV and allow you to invest more in CAC because it will pay off over the customer lifetime. If you’re a challenger brand trying to break into the market, you’ll also probably need to spend more to carve out market share.

On the other hand, a heightened CAC often lasts longer than the strategy that justified it. Perhaps you’ve been spending more on CAC and achieved that growth, and now it’s time to be more disciplined and reign the spending in. If you’re not tracking your CAC and comparing it to the industry average, you’ll never know when it’s gotten out of control.

Calculating your CAC

To calculate your company’s CAC, start by defining the period of time you want to measure. If you’re only interested in determining the results of one marketing campaign, start from its inception. If you want to understand your CAC as a whole, choose a longer timeframe — a month, quarter, or even a year.

Next, add up the expenses associated with your marketing efforts. Keep in mind that this number will go beyond what you’ve spent on the actual marketing campaign. There are employee wages related to your marketing and sales, in addition to the costs of software, e-commerce platform, testing, analytics, and professional services like web design. Try to make sure you’re only counting marketing (and perhaps sales) budget spend, so you don’t wind up weighing the calculation down with spend from other departments.

Once you’ve added up all the expenses that go into your customer acquisition efforts, divide that by the number of new customers acquired during that time. The result is your CAC.

Marketing Spend/Customers Acquired = Customer Acquisition Cost

How does your CAC compare to your industry? How does it compare to your own CAC over other periods? Both of those comparisons can shed a lot of light on where your marketing stands today.

How to lower your CAC

Once you know what each customer costs you and how that relates to other companies in your industry, you can take steps to improve your ratio. One solution is direct mail, as you can partner with a firm that has responsive data and mailing lists, and that will provide analytics to ensure you’re targeting the right people and getting your desired results.

In fact, direct mail has one of the best CACs of any channel. By creating compelling marketing collateral and targeting the right leads, you can lower your acquisition costs and maximize ROI.

Gunderson Direct has long-lasting relationships with some of the country’s largest corporations, helping them to lower their customer acquisition costs and, therefore, increase their profits through direct mail. We drive leads and help our clients close business through these efforts. Drop us a line for more information on how our direct mail expertise can help your business.