Despite what many marketers believe, Cost Per Acquisition (CPA) is not the same thing as Customer Acquisition Cost (CAC). Considering how important these metrics are to the health of your company, mixing them up can result in an entirely preventable failure.
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How is Cost Per Acquisition Different from Customer Acquisition Cost in Marketing?
What is Customer Acquisition Cost (CAC)?
The cost to acquire a paying user.
What is Cost Per Acquisition (CPA)?
The cost to acquire a non-paying user.
Getting more detailed depends on the business, but the general rule is that CAC measures the company’s money source, and CPA measures the users who aren’t paying, but who support the money source. Which means it’s usually easy to figure out what measures what: you just have to follow the money.
- If you sign up for a free month of Netflix, you’re measured using CPA. Once you pay for the first month after, you’re measured using CAC.
- If you’re a Facebook user, you’re measured using CPA. If you’re a Facebook advertiser, you’re measured using CAC.
- If you make an account on an e-commerce site without purchasing, you could be measured with CPA. Once you’ve made a purchase, you’re measured with CAC.
If you run an e-commerce business, CAC is likely a lot more important to know than CPA. CPA offers e-commerce companies a way to measure things like the conversions of registered users to paying users, but the cost of acquiring an actual paying customer (CAC) is more useful.
Why Does Customer Acquisition Cost (CAC) Matter?
Your Customer Acquisition Cost will tell you whether or not your business can succeed. If your CAC is higher than your Customer Lifetime Value (LTV), then the answer is no, your business cannot succeed.
- Company A’s LTV is $40, and their CAC is $45.
- Even if they become one of the most popular companies in the world, that company is doomed unless the metrics change.
This may seem obvious, but even as we head into 2019, many online retail companies haven’t figured out these metrics for their company. They may be paying more than they can possibly make back, without even knowing it.
It’s also important to know how much higher your LTV is than your CAC, as it will inform how quickly your company’s revenue will grow.
- Company A’s LTV is $40. Company B’s LTV is $400
- Company A spends $10 to acquire a customer. Company B spends $200
Even though Company B makes $200 per customer and Company A makes $30, the CAC:LTV ratio shows that Company B will be able to scale twice as quickly.
You can also use this ratio to examine individual channels and campaigns. If you calculate the CAC for each of your separate marketing channels, you’ll know which these bring you the more affordable customers. Combine that with your LTV, and you’ll know which channel brings you the most valuable customers overall.
Gauge which of your marketing campaigns were more effective by finding the CAC for that campaign (Marketing Campaign Cost/Number of Customers Acquired), and comparing it to the value that campaign generated. You should know your CAC. It is vital to scaling your company.
How to Improve Your Customer Acquisition Cost
There are many campaigns you can run that focus on lowering your CAC, but you should first break your CAC down to find out which part is giving you trouble.
Customer Acquisition Cost = Cost Per Visit/Conversion Rate (CAC = CPV/CR).
Is the problem with what you pay to bring a visitor to your site? Or, is the issue that you just aren’t converting enough of them? Rather than blindly experimenting with a list of suggested campaigns, it’s more for your benefit to drill deep enough to find the source of your high CAC so you can focus on that metric.
How to find your Cost Per Visit (CPV)
CPV = Total Marketing Costs (acquisition and retention) / Total Number of Visits
Analysis 3: Company C
Annual acquisition spend: $20,000
Annual retention spend: $30,000
Annual total marketing cost: $50,000
Annual number of visits: 2,000,000
50,000 / 2,000,000 = 0.025
Company C spends 2.5 cents for every visit to the site.
How to find your Conversion Rate (CR)
CR = Total Number of Conversions / Total Number of Visits
Analysis 4: Company C
Annual number of conversions: 54,000
Annual number of visits: 2,000,000
54,000 / 2,000,000 = 0.027
Company C has a conversion rate of 2.7%
Now that we know our cost per visit and our conversion rate, we can finally calculate our customer acquisition cost (remember, CAC = CPV/CR).
0.025 / 0.027 = .93
The average customer acquisition cost for Company C is $0.93.
How to Improve Your Cost Per Visit (CPV)
Let’s say you’re converting customers just fine, but it’s costing you too much to bring them to the site. Here are a few ideas to bring your costs down:
If you don’t know where your best visits come from:
- Identify your best acquisition channels:
- Track the number of visitors coming in from each channel.
- Divide marketing spend for that channel by the number of visitors gained
- Which channel brings you the cheapest traffic? Which is most expensive?
- Which channel brings you the customers with the highest Customer Lifetime Value? Which brings you the lowest?
- Focus your energy and budget on what works.
- Identify your best acquisition campaigns: divide the cost of each campaign by the number of visitors gained. Which campaigns are your most cost-effective? Replicate them.
- Identify your best retention campaigns: divide the cost of each campaign by the number of customers retained. Focus your time and budget on the ones that are most cost-effective.
If you don’t know which customers, or potential customers, to target:
- Use the purchase predictions of your current users to create a Facebook/Google audience for a remarketing campaign.
- Segment your customers by their Customer Lifetime Value, and make sure your retention campaigns that target high-value customers have the most budget behind them. Make sure you also aren’t spending too much to retain low value segments.
If you think you’re spending too much on ads
- Use negative audience segmentation to ensure no ads are wasted on an audience unlikely to convert.
- Use ad frequency capping to limit the number of times a visitor will be shown an ad
- Attract organic traffic through SEO, unique product descriptions, and other e-commerce optimization strategies to reduce dependence on paid traffic.
How to Improve Your Conversion Rate (CR)
How about the opposite? What if you’re getting a whole lot of traffic, but none of it is converting to sales? Try these campaigns:
If you don’t know where the problem is:
- Perform a funnel analysis to find where customers are dropping off on your site
- A/B test different variations of the site layout, based off your analysis, until you find a customer flow that works
If you have returning visitors that still haven’t purchased:
- Personalize your site to include recommended content, with recommendations based around browsing history
- Deploy banners to returning visitors, recommending products based of their browsing history
- Deploy banners to returning visitors who have an abandoned cart, reminding them of the items in their cart
- A badge on the site highlighting current sales
- Send personalized email offers based off of their browsing history
If you think your site’s appearance may be the issue:
- A/B test multiple variants of small modifications (red CTA, blue CTA or green CTA?) until you find what performs best
- Minimize any distractions around your point of sale. Your product pages should essentially be landing pages leading to the completion of a transaction
Next Steps: Customer Lifetime Value
Customer Acquisition Cost is only one side of the Online Retail Formula. The next article in our Retail Math series will focus on the the other side of the formula, Customer Lifetime Value.
If you’re ready to start improving your Customer Acquisition Cost, or any other part of the Online Retail Formula, schedule a free demo with Exponea to get started.