(w/ free calculator download at the end… keep reading)
A typical business advertises and markets themselves across multiple channels, such as their own website, social media, pay-per-click or performance advertising (i.e. Facebook ads and Google AdWords), in-print and offline marketing and advertising, attending trade shows, and possibly even radio and/or television placements.
To know your CAC (Customer Acquisition Cost) overall, and therefore how much you should be spending to acquire a new customer to ensure your marketing remains profitable, it’s mandatory to examine how much money you are spending both overall and on each individual channel or platform that makes up your overall marketing mix. It just makes (dollars and) sense.
But knowing your CAC is only half the puzzle. There’s so much more to know.
Do you know what the actual value of a customer is to your business, both in the short term (i.e. in their first month working with you or a typical cart value on their first sale, if you’re doing e-commerce)… and the long term, when they come back for more?
Time For A Reality Check
Let’s work through a quick example. If you spend $300 per month on advertising via Google AdWords, but only 10 customers result from your campaigns and each of those people spend on average only $15, say for a book or other product of yours, are you recouping your investment on that advertising? NO!
Now, there could be many reasons why your advertisements aren’t converting at a higher rate, all of which could turn a poorly performing campaign like that into a winner. But that’s a subject worthy of several blog posts all on its own.
The big takeaway to focus on here is to highlight the importance of figuring out in advance just how much you should be spending to acquire a new customer, so you have the best chance of making a solid profit. To do that you’ll need to keep track of where each customer came from and how much he or she spends with your business.
Once you’re equipped with that knowledge you’ll be able to identify the marketing channel(s) you used to acquire those customers and then double down on what’s working. Heck, it’ll probably also give you insights in what to try next so you don’t go back and repeat old mistakes.
Getting Down to the Brass Tacks
The simplest way to figure out your current Customer Acquisition Cost is by listing all your expenses related to marketing and promotion in a spreadsheet for a given month and then divide the result by the number of customers you obtained. That’s the easy stuff, and something you should be doing today so you can benchmark what you do tomorrow.
But the real magic comes when you’re able to figure out what you maximum allowable CAC should be before you’ve spent anything. Wouldn’t that be nice? Well, it’s possible if you know how.
Here’s an example:
Say you were to spend $4,500 on marketing this month (maybe via Facebook ads, which happens to be our specialty) and the campaigns you run ultimately bring in 23 new customers for your business. Then your CAC would be just $195.65. Simple, right?
And if each of those customers or clients represents an average of $600 to your business, per month, then you’ve just made $13,800 – or a 3X return on your investment. Not too shabby…
But wait, there’s more.
If each customer typically works with you for an average of 4 months, then you’re actually looking at an ROI of 12.26X!
See how that works? For every $195 you spend, you’re making $2400. And that ain’t bad.
If you know what your numbers look like now, it’s a worthwhile exercise to sit down and see what your numbers could be if you venture down a new path. Of course, you’ll need to know all the available levers to pull and buttons to push, so to speak, and what’s “reasonable” in terms of click through rates, cost per clicks, and conversion rates within the context of your particular business and your overall industry.
At Oscar Diggs Digital that’s exactly the sort of things we know (and know how to figure out), and we run those numbers for every prospective client we get on the phone with, because we believe that no matter how great the marketing might be, if the numbers don’t work you shouldn’t do it. We’ve even built out some pretty hefty calculators to help out with the job.
Using just 4 pieces of information about your business we can tell you how much your advertising budget should be to hit your goals, how many conversations you should be having with new prospects each month (which we’re very good at bringing to your doorstep), and how much you can realistically afford to pay per lead and still be profitable. In fact, you can even tell us how much you want to make and we’ll tell you if it’s possible based on how your business runs right now and, if the numbers say it is, we’ll share with you exactly what you need to do to make it happen.
It’s not magic. It’s just math balanced with a deep understanding and appreciation for what’s working on the creative side right now when it comes to good digital marketing.
Here are the goodies you scrolled for…
If you’re running a service-based business (i.e. gym, spa, or tutoring center; or you’re a realtor, doctor, lawyer, or even a car dealer) and you’re curious to see what your numbers look like, give our Facebook Opportunity Calculator a try. If it looks like there’s a fit we’ll send you a full confidential work up of your numbers tailored just for your business, completely free of charge. The only thing you have to lose is uncertainty.
Or maybe you’re running an e-commerce site and you’re curious to know exactly how much your ad budget needs to be to hit your targets? Try out our e-commerce Ad Spend Calculator! We’ll send you a copy of our very own in-house excel file straight to your inbox. Get your download here.