The Math Behind Successful As-a-Service: Understanding and Calculating Customer Acquisition Cost

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In the second part of our ongoing series ‘The Math Behind Successful As-a-Service,’ we’re diving into customer acquisition cost (CAC): what it is, how it’s measured, and how it can serve as a meaningful indicator of profitability.

Missed Part 1? Explore the Math Behind Churn and Increase Retention  Learn More >>

What Is Customer Acquisition Cost?

Customer acquisition cost is the amount of money that it costs to gain a customer. It’s calculated by dividing the cost of sales and marketing by the number of customers acquired. CAC metrics help companies determine and compare the costs of acquiring different customer types and evaluate acquisition strategies.

By tracking your CAC, you can determine which are the most effective and efficient targets and methods for acquiring new customers—and thus grow your business.

Why Does CAC Matter?

Acquiring a new customer can cost anywhere from 5 to 25x more than retaining an existing one.

As a service provider, with this much money at stake, you want to keep customer acquisition costs as low as possible to maximize your profit. Monitoring your CAC helps you gauge the cost-effectiveness of your acquisition strategies and tactics, such as paid advertising, social media buys, public relations, and events.

Your CAC isn’t just a vital metric—it also feeds into other key performance indicators (KPIs), like customer lifetime value, and impacts your overall bottom line. When making pricing decisions, CAC can help you to determine how profitable a client must be to offset the cost of their acquisition—and whether certain clients are worth taking on in the first place.

How Do You Calculate CAC?

CAC is calculated by dividing the cost of sales and marketing by the number of customers acquired. It can be calculated monthly, quarterly, or annually, depending on your marketing, sales, or contract cycle. Once you decide on the period, apply the corresponding costs and customers to this formula:

(Costs for Sales & Marketing to New Customers)
____________________________________
# of Customers Acquired

As a service provider, you should aim to recoup the cost of acquiring a customer within the first 12 months of working with them. Understanding how to calculate CAC is an essential first step toward hitting profitability goals and prioritizing your target audiences.

How to Improve CAC

You can positively impact CAC and ensure profitability by investing wisely in your marketing strategies. It’s important to avoid overinvesting and sinking in resources that ultimately go to waste, but you also want to avoid underinvesting and spending too little to make an impact. At the same time, you need to make sure you’re targeting the right clients for your business—and that you understand how to market to these ideal customers and what messages are the most persuasive to them.

To begin, consider what goes into your customer journey and all of the touchpoints that mark a provider-client relationship, from introduction to billing. Understanding the lifecycle of your interactions with customers helps you market to them more effectively. Next, get to know and understand your prospective clients, including their needs, wants, challenges, and goals. Once you have a clear sense of these, you can create persuasive messages that show you can fulfill or solve them. Finally, familiarize yourself with the fundamentals of sales and marketing. For a broad overview, you can start here:

  • Marketing channels: paid vs. unpaid

    In today’s world of marketing, you have endless options to choose from. Some are free, and some you pay for. You can invest in search engine optimization (SEO) efforts to get your name to the top of customers’ search results (also known as search engine results pages, or SERP), or in earned media efforts (also referred to as publicity) to promote your business in their news.

    Paid marketing includes paid search, paid social, and paid media—options where companies pay entities to run advertisements alongside organic or editorial content. Unpaid marketing, on the other hand, includes SEO, organic social, earned media/publicity, email marketing, and referral programs.

    Nothing is totally free. Some channels—for instance, sponsored posts on platforms like Facebook—cost money upfront, whereas others, like organic social media, simply cost the labor it takes to produce the posts.

  • Field marketing efforts

    Through field marketing efforts, like trade shows, lunch and learns, and networking groups, you can put yourself on the radar of potential new clients and prove your expertise. Instead of telling prospects how advanced your understanding of technology is, you can show them, demonstrating your skills and incentivizing them to listen. In return, you can also glean valuable feedback directly from your current and prospective customers, which can be used to fine-tune future marketing efforts.

  • Campaign monitoring

    Marketing is an investment, and you want to make sure that you see a return. It can be difficult to measure the effectiveness of specific paid advertisements, since customers may be exposed to multiple ads and make multiple searches on the road to conversion. The advantage of digital ads is that you can track engagement.

    For example, with an attribution model, you can gain a better understanding of which digital ads or campaigns are most effective by assigning credit to each type of click. The amount of credit can vary and depend on whether it is the first ad, last ad, or some combination of ads. By assigning a value to each type of click, you gain strategic insights about how your ads contribute to conversions—and the ROI on your marketing investment.

  • Inbound vs. outbound marketing

    By offering substance and wowing with expertise, inbound marketing draws clients to you. Some of the most common forms of inbound marketing are blogs, eBooks, white papers, social media campaigns, and videos. Conversely, outbound marketing reaches out to clients, typically through paid advertisements. Outbound marketing tactics typically cost more than inbound campaigns and are generally thought of as more traditional.

    When deciding between inbound and outbound marketing, ask yourself: which channels do my ideal customers engage with? Ultimately, the goal is to meet your customers where they are, whether that’s through social media campaigns or television advertisements.

    While the success of many outbound marketing tactics has been affirmed over time, there is an important difference between inbound and outbound: in contrast to paid marketing opportunities, inbound marketing has a much greater propensity to increase a company’s perceived authenticity and credibility.

From Marketing to Sales

The vast majority of marketing is launched with one goal in mind: sales.

On average, it takes five to seven touchpoints to close a sale with a client. Once you’ve marketed to your client and proven that you’re the best service provider for them, you need a process in place for what happens next. Here are three tips to help you build out this process:

  • Master the handoff

    Make sure your sales and marketing teams are communicative, coordinated, and have a procedure for managing your customer pipeline. By planning the handoff from marketing to sales, you can ensure that the efforts of your marketing team aren’t going to waste and that your sales team isn’t overwhelmed.

  • Track sales

    By leveraging automation tools, you can make your sales process significantly more efficient—thereby lowering your CAC. Deploy marketing analytics to track your campaign performance and create accountability, generate accurate, professional quotes and proposals in minutes, move prospects seamlessly through the pipeline, and avoid missing a single opportunity by utilizing powerful tools that simplify and streamline the leap from marketing to sales.

  • Put quality over quantity

    From a revenue perspective, any CAC analysis will show you that not all clients are created equal. It’s better to have fewer, more profitable clients than buckets of low-margin customers. Make sure your marketing initiatives are geared toward making sales to ideal clients, placing quality over quantity. By deciding which clients are the most worthwhile, clearly defining your process, and communicating consistently, you can qualify leads and ensure you only enter into mutually-beneficial client relationships.

With a clear process in place, your team will find it easier to move ideal prospects through the pipeline—leading to more conversions and greater profitability.

Get Smart About Your KPIs

Check out our KPI Calculator for a deep dive on CAC and other important metrics.