Determining your target acquisition cost is an essential step before determining which of the different strategies for customer acquisition you will pursue. This is the first step in any customer acquisition strategy. Without knowing what your target acquisition cost should be, it's impossible to know how much you should be spending on marketing and advertising to scale your ad spend sustainably. In this blog post, we'll discuss what the target acquisition cost is, and how to determine what yours should be.
Customer Acquisition Cost Why It Is Important To Online Marketing Campaigns
Customer acquisition cost (CAC) is the amount of money that a company spends to acquire one new customer. This should include advertising and other miscellaneous customer acquisition efforts. TAC is important to online marketers because it provides you with a target acquisition cost for acquiring new customers. If a company hasn't thought through the numbers involved in its customer acquisition process, it may not be able to profitably acquire customers. On the other hand, if a company's TAC is too low, it may not be able to acquire the volume of customers needed to scale its business.
Taking it another step further, if you understand the relationship between your customer acquisition cost and customer lifetime value, you can balance how much you can afford to spend to get the new customer in the door with the value of your customer over a set period of time.
For example, if your company spends $10,000 on marketing and sales and acquires 100 new customers, then its CAC would be $100. If you know the customer lifetime value of your customers say $1000 over 3 years. You can improve your customer acquisition strategy by spending more to get your customer.
Of course, if you are looking to scale your Facebook ad spend sustainably you may want to use a 60-day window for lifetime value. Subscribe to stay in the loop.
What Factors Influence My Target Customer Acquisition Cost
Two important factors to consider when looking at your target acquisition cost are the cost of delivery and the cost to acquire customers.
The cost of delivery includes the cost of making the product/acquiring it, shipping & handling, transaction fees, and returns.
The cost to acquire new customers includes the cost of advertising and I like to include discounts.
Determine Which Product To Run Paid Marketing Campaigns For
Do you have a clear objective in mind? Who are your existing customers? Look at which products and categories have a high conversion rate. As always measure your results once launched.
You'll also need to consider your competition when deciding which products to start promoting when you are acquiring customers.
Make a list of competitors, this can be a mental list or a spreadsheet. You can also steal my spreadsheet.
Here are some items that can help you when determining which product to use at the top of your customer acquisition funnel.
Make note of the products that they are promoting in their ads. You can use a tool like.... to view your competitor's ads. If they are spending money on a particular product they must be seeing some type of efficiency from these ads.
Are they using a loss leader as their customer acquisition strategy? Meaning they are losing money on their first purchase. Maybe buy the loss leader to see their customer acquisition strategy.
What landing pages exist for your competitors
Calculate the cost to produce the product (COGS)
The cost of goods is the total cost incurred by a company to produce a particular product or service.
Various factors need to be considered when calculating the cost of production, such as raw materials, labor, overhead expenses, and shipping. Raw materials are typically the largest expense associated with production, followed by labor.
At the end of the day, you should have a final number that is your Cost of Goods Sold
Add Shipping & Handling Costs
Shipping costs will vary depending on the size and weight of the product being shipped.
To calculate the cost of production, businesses will need to consider all of these factors and determine the best way to optimize their expenses. By carefully managing their costs, businesses can ensure that they are pricing their products appropriately and maximizing their profits.
Again we are looking for a final number or a ballpark we can use to help us determine the cost of delivery.
Transaction Fees
Every time a transaction happens your payment processor takes a small % of the sale or a set fee depending on your provider. If you can find an average be sure to grab that as we will use that for our calculations.
Calculating Average Return Percent Per Month
There are a few different ways to go about this, but the most important thing is to be consistent with your method. Once you have your monthly return percentage, you have everything you need to set your cost of delivery
To get started, take a look at your existing customer acquisition numbers from the past few months and calculate your average return percent per month.
Take your total returns for the month and then divide by total orders for the month. Do this for the past 3-5 months to give you an average.
For example, you have 10 orders returned and 100 orders for the month leaving you with a 10% return rate.
Using Cost Of Delivery To Sustainably Drive Facebook Spend
Adding these four metrics will give you the cost of delivery.
COGS + Shipping & Handling + Transaction Fees + Returns = Cost Of Delivery
If you are looking for more on using your cost of delivery to drive sustainably Facebook ad spend check out our guide
Tips For Developing Target Customer Acquisition Cost
Use the right numbers
First when calculating out cost only use working dollars. These are usually variable costs. The most common working dollar cost is your advertising budget, but could also include a PR budget or affiliate payouts. Not included in your customer acquisition cost is the salary of your employees/contractors as well as software costs.
Use customers, not orders to determine CAC
Secondly, ensure you use new customers and not orders to calculate your customer acquisition cost. Helpful reminder that orders can be placed by multiple customers.
You can find this number in Google Analytics by first "adding a new segment" for first-time purchasers.
Once done go to conversions -> Ecommerce -> Overview.
As you can see we have all transactions and our first-time purchasers from all of our customer acquisition efforts.
Track New Customer CAC
Third, set up a spreadsheet to track blended customer acquisition costs.
You can download this sheet below.
Monthly you can pull ad spend from the ad platforms as well other marketing platforms.
Then using the method above for finding customers in Google Analytics you can pull new customers and total customers. The difference between these is your existing customers.
Blended CAC is the customer acquisition cost for all marketing channels.
If you wanted to take this a step further you could create additional rows for each marketing channel and add in channels that have variable costs. Examples could be direct mail or email marketing if you buy a list.
You could then take the spending channel and divide it by the new customers from each channel according to Google Analytics. This helps you see what the customer acquisition cost is by channel. Keep in mind that new customers in Google Analytics are last-click attribution for each of your marketing channels this means that the new customers may not line up with what you see on your advertising platform.
If you want to see this in Google Analytics. Go to Acquisition -> All Traffic -> Source / Medium.
Channel Specific Customer Acquisition Strategies
The last step once you know your target customer acquisition cost the next step is to develop a successful customer acquisition strategy.
If you would like my help developing your customer acquisition strategy, feel free to reach out
New Customer Acquisition Strategies
Your marketing campaign should be designed to generate interest in your product and attract potential customers. Below is a shortlist of ideas to help drive new customers
- A cosmetics company uses a loss leader pricing strategy to attract new customers. They offer a free shipping promotion for orders over $50.
- A clothing company offers a 15-20% discount on first-time orders.
- A toy company promotes a buy one, get one 50% off deal.
- Facebook / Instagram messenger to send PDF or guide. Using Facebook ads you can create a target audience o people who message you first and retarget them.
- Tik Tok to generate brand awareness and reach.
- User-generated content via influencers on social media platforms.
- Drive traffic to landing page for wholesale partners, affiliates or influencers. For this you need to determine the target CAC you can afford to spend based on the value each of your partners brings to you business over a set period of time.
Final Words On Setting Target Acquisition Cost
Any marketing efforts to acquire new customers should come from a place of clarity regarding the target cost to acquire a new customer.
Without a clear target regarding new customer acquisition costs your marketing department will be shooting in the dark.
Once you have your target acquisition cost you can set up your customer acquisition process and know that the new customer acquisition strategy you are using can be measured.
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