Product Metrics for Web Analysts: Customer Acquisition Cost

As a digital analyst, I spend a lot of time looking at data generated from websites - data such as pageviews and conversion rates. Web browsing data, however, only gives a partial view of the success of a business because your website is only one component of your overall marketing mix. It’s easy to forget that some business metrics live outside of our web analytics package.

Business metrics (such as customer acquisition cost) are important because they help identify whether our product is succeeding or failing at making money.

In this series of posts, I’ll show you how to combine data from multiple sources to calculate critical business metrics. These metrics will help you gain a more complete understanding of your online business. As we go, I’ll pull data from Pointless Projects to illustrate how you can apply these metrics to your own business. Let’s start with Customer Acquisition Cost (CAC).

What is Customer Acquisition Cost? #

Customer Acquisition Cost, or CAC, is the amount that you pay to acquire each new customer. It’s a large part of the overall cost of running a web business, which includes other costs such as product development and hosting.

CAC is important because it shows you the cost of different sources of new customers, allowing you to prioritize sources that give you a higher return on investment. When combined with monetization metrics such as customer lifetime value, it tells you whether or not your business model is viable and provides ways to increase profitability.

Calculating CAC is straightforward, but there are a number of considerations that make it an even more valuable metric. At its most basic, CAC is the sum of your marketing costs in a given period divided by the number of new customers you acquired in the same period:

CAC = $ spent on marketing / # new customers

Segmenting CAC for Greater Insight #

As with most metrics, CAC gets more interesting when we begin to segment it into different groups. You can segment on any detail of your marketing mix, including:

• Channel (did this signup come from your email list, organic search, or a paid ad?)
• Ad source (did this signup come from an ad on Google or reddit or Yahoo?)
• Campaign (was this a promotion or special offer?)

Measuring CAC on your own website #

The first step to segmenting CAC is understanding your acquisition funnel, which will be easier for some businesses models than others. If you have a long sales cycle with many (possibly offline) touchpoints, it will be difficult to measure this funnel. If you are driving paid media traffic to a landing page, it will be easier. We use Google Analytics to measure how many people reach each step in our acquisition funnel, which runs from ads to a landing page where you can sign up. You can use any other web analytics package as long as you can see how many people move through your checkout process. It’s also helpful to tie your measurement through to your checkout page so that you know that people are paying you money, and they’re not just robots filling out your forms.

Different platforms will give you stats at different points in the overall conversion funnel. For example, your ad platform might report a cost per impression instead of cost per action. Normalize back to a single number so that you can accurately compare costs across different traffic sources. Here’s some sample cost and performance data from Adwords for pow wow.

When pulling cost information from a paid media platform, don’t forget to calculate staff time and materials in the overall marketing rate. Time spent setting up ad campaigns or writing marketing copy all counts as a cost towards acquiring new users.

Let’s assume that we spent $300 in time and materials setting up these ad groups. Distributing that cost evenly across the three groups gives us an extra cost of $100 per ad group and bumps up our CAC considerably.

This calculation assumes a last-touch attribution model, where people convert directly after a single interaction, which gets full credit for that conversion. In reality, people will often have a more complex series of interactions with your site as they read, learn, and compare your product. Web analytics packages are getting better at modelling these interactions, but you should still be careful about developing multi-touch models for your business.

What is a good CAC? #

The difference between a good CAC and a bad CAC depends on how much money you are able to make from each new customer, the lifetime value of a customer (LTV).

• When CAC < LTV, you’re making money
• When CAC > LTV, you’re losing money

It makes a lot of sense to pay more to acquire high-quality users who will use (and pay for) your product for a long time. We’ll calculate the customer lifetime value in another blog post soon.

How to improve your CAC #

Knowing your customer acquisition cost is less than half the fun -- it’s only valuable once you apply it to your marketing mix to prioritize less expensive acquisition sources. Lots of tactics can reduce your CAC, but you can start by:

• Reallocating media spending from ads and channels that have high customer acquisition costs to those that have a lower acquisition cost.
• Working towards tighter integration between your paid media and value proposition. A common cause of high funnel dropout rates is people not finding the information they expected on a landing page.
• Searching for new acquisitions channels. Find places online where potential customers hang out, and find ways of communicating with them.
• Identifying and rewarding brand ambassadors. A good referral program can bring in targeted traffic at low costs.

Coming up next... #

In my next post, I’ll look at ways of calculating customer lifetime value to tell us the ROI of our business. Now go forth and calculate!

Be sure to review our User Growth services at Viget!