A few weeks ago, our Hillary Berman had the privilege of sitting down with Elana Fine, Executive Director, Dingman Center for Entrepreneurship, and Joe Bailey, Associate Research Professor, Robert H. Smith School of Business to record and episode of Bootstrapped. They chatted about startups and marketing, her startup story, and, of course, Customer, LLC. As they were chatting about how small businesses and startups should make decisions about which marketing programs are right for them, they got into a conversation about the relevance of Customer Acquisition Cost.
Customer Acquisition Cost (CAC) is a metric taught in marketing classrooms in business schools around the world. It’s the notion that companies can evaluate marketing budgets and programs based on the total expenditure divided by number of customers gained as a result of the effort(s). While it is interesting to consider, it cannot be used in a vacuum as a benchmark for success of a campaign or marketing program.
For example, you might have a low CAC, but then have to invest significantly in retention to get that customer to purchase again (and again and again). And as customer experience continues to take center stage for many organizations, the costs associated with customer service or customer retention efforts may far exceed your initial investment. On the flip side, you might have a high CAC, but a highly profitable product that makes the investment notably worthwhile. The final struggle for small businesses and startups is tracking. Google Analytics and Facebook conversion metrics rarely tell the full story in terms of true customer acquisition. Unless your business is tracking the source of every sale, an accurate CAC is tough to come by.
Getting Beyond CAC – Choosing Marketing Programs That Make Sense
No small business or startup likes to talk about marketing budget. Because no matter the size of the budget, we always wish the numbers were larger. Making choices is essential. And CAC only answers one of many questions that are essential to evaluate to predict program success. We ask 6 key questions:
- Does this opportunity help you reach your target market?
- What action do you want your target market to take and does the opportunity allow that to occur or move the customer closer to that action?
- Even if the opportunity doesn’t directly support marketing or business goals, do you still have a compelling reason to pursue it?
- Can you afford it?
- Are you equipped to support growth when the campaign is wildly successful?
- Are you considering a program just because competitors are doing it?
Specifically on cost, when evaluating either affordability or CAC, consider the full cost of the effort. For example, while having a table at a local event may only be a few hundred dollars, what do you need to make the event a success? Do you need a display, handouts, samples or other tangible materials? What about staff – do you need to pay team members by the hour to man the table? And on the flip side, what supplies do you already have on hand that can utilize to help reduce the overall expense? With this full picture of the cost of an opportunity’s cost, you can better decide if you can afford the program.
But if not CAC, how should small businesses and startups evaluate marketing investments? As with everything, we recommend beginning with the end in mind. Focus on both the marketing and business metrics that matter to your business.
Using the same local event example, how much revenue do you need to bring in directly from the event for it to be considered a success? Or, based on your existing conversion rate for new leads, how many new names do you need to collect for pursuit? Also ask yourself what success means to you – dollar-for-dollar break even on the money actually spent? Or is a smaller number ok because you’re collecting names for your mailing list and supporting brand awareness? Or perhaps you want to earn a larger return to account for your time spent in planning the event. The answers are unique to each business and none are wrong so long as you’re honest and realistic in your evaluation.
Intrigued? There’s more in the podcast. Tune in to Bootstrapped. Episode 35 airs on December 19.