Paying Attention to Customer Acquisition Costs Metrics
Figuring out which metrics you should pay attention to can sometimes feel like a risky gamble, especially when you only have a short window with which to impress your clients or bosses. Judging which numbers matter and which just fall on deaf ears can mean the difference between a huge commission and getting fired. Of course, it doesn’t make matters easier when the people you are presenting the numbers to don’t understand them or have their own measuring sticks for Internet marketing success.
Figuring out the right formula for which metrics to present and which to hold onto for your own personal use is a constant trial and error process that could be costly during a time crunch situation. To help you out, here’s one surefire set of metrics that you need to bring to the table each and every time: customer acquisition cost breakdowns.
Working with Customer Acquisition Cost (CAC) Metrics
In its simplest form, CAC equates to your total sales and marketing cost. Simply add up all of your program’s advertising spending (including salaries, commissions, bonuses and overhead for your desired time frame e.g. monthly, quarterly, yearly, etc.), divide that by the amount of new customers you’ve pulled in during that time frame, and you have your CAC. For example, if your total Sales and Marketing is $50,000 and you’ve pulled in 500 new customers in that time frame, your CAC is $100.
Figuring out the Marketing Percentage of CAC (M%-CAC)
Next, break this down into the marketing percentage of your CAC (M%-CAC) and use that to map your overall effectiveness during each of the different marketing campaigns you employ. This is a great way to look back and figure out which strategies worked best for bringing in new customers, allowing you to optimize your marketing while streamlining your budget.
To do this, simply use only the marketing numbers (not sales) you used to calculate the CAC, divide that by the number of new customers and you wind up with the marketing percentage of CAC. Tracking this number over time can mean a few things:
– An increased percentage could mean you’re overspending on marketing
– Sales missed their quota
– An attempt at raising sales was made in addition to providing higher quality leads
For long sales cycles on outside sales, your M%-CAC might be around 15% while inside sales teams with less complex sales cycles could be around 40%. Baseline companies that employ simple sales cycles with low-costs (e.g. automated sales) could be looking at 60% to 90% numbers.
Ratio of Customer Lifetime Value to CAC (LTV:CAC)
Finally, you should to figure out the current value of an average customer and relate that to the amount you spent to bring in that customer. To get started, simply take the revenue the client pays you in a given time period and take away the gross margin from that number. Next, divide that number by the estimated churn percentage (i.e. cancellation rate) for that type of customer and this will give you the customer’s lifetime value (LTV).
Compare this with the CAC and find out your ratio of LTV:CAC. While higher ratios mean your sales and marketing have a higher ROI, too high of a ratio is a telltale sign that you’re not spending enough on sales and marketing to optimize your growth potential.
Using this information in the right context can shed light on the great job you’ve been doing within your budget and even get you a bigger one.at job you’ve been doing within your budget and even get you a bigger one.