One of the most important metrics in any business is the cost of acquiring a new customer. Usually this is the most expensive item in a (successful) business model, and yet many executives and marketing folks don’t know what it is.
The customer acquisition cost, “CAC”, is the aggregate of all costs associated with the successful acquisition of one (typical)Screen shot 2010-04-26 at 9_43_54 AM client. A simple example from a client of ours will demonstrate. The client is employing direct mail to bring in new students to a school. He mails 1,000 full color, 8.5×11 postcards with a compelling call to action. The budget:
Cost of Direct Mail printing $450
Cost of Bulk Postage $360
Total Cost: $810
The campaign results in six new enrolled students. Therefore, the customer acquisition cost is $810/6=$135
It cost this client $135 to acquire a new customer. Is this a good number?
In this case, it is a very good number. One customer is worth approximately $6,000 per year in direct revenue. If we assume a profit margin of 30%, then the client has spent $135 to acquire $1800 of profit.
This represents a 13x net return on his investment in year one. To put it in perspective, Warren Buffet averages about a 0.2x return annually, and he’s considered the greatest investor in history.
Now that the client knows he can ‘buy’ a customer for $135, he can make a decision about where to spend his marketing dollars. In this case, the client will maximize his direct mail opportunities, because the ROI is unbelievable. Of course, direct mail has its limits for most businesses. This client only serves a geographic area of about 10,000 households, and only a portion of those fit his demographic. So, he can mail that small list over and over, but that’s it. His CAC will rise as he mails the list repeatedly, because he’s already culled the ‘low hanging fruit’.
This is why any marketing plan must include diverse marketing strategies, even if some channels generate customers at a higher cost. In this client’s case, he spends several multiples of his direct mail CAC to acquire new customers through digital (online) channels. Why spend $800 to acquire a customer when you can spend $135? Because you can’t get all you want through direct mail, and even at $800 CAC, the client does well. Look:
Digital CAC $800
Net Income Per Student $1800
ROI on Digital Spend: 2.25x
At a 2.25x net ROI on digital advertising, our client is still doing 10 times better than Warren Buffet. Not bad for a rural Christian school, is it?
Of course, our client tends to keep his customers for more than a year. This means his return on that CAC is even greater, but in order to determine that, we need to know what his Lifetime Customer Value is, and that’s for another post.