How Much Should You Pay for a Customer?
Too often in marketing, customer acquisition cost and defining how much can be spent to get a new customer is overlooked, misunderstood and sometimes, purposely ignored. When cost of acquisition is discussed, it’s almost always in the past, as in what was paid to acquire that customer rather than what should be spent. Touting that you got a new customer for $20 without first defining Maximum Allowable Customer Acquisition Cost has no context, no meaning. Is that a good number? Who knows.
I believe that nailing down how much can be spent on acquiring a new customer must be done before marketing can begin. Marketing supports the business, never the other way around, and all efforts must be conducted for a profitable outcome. A defined maximum for Customer Acquisition Cost (CAC) provides a concrete marker to work and evaluate against. Rather than being reactive, marketers can now look forward, giving them the ability to forecast results / spend, make immediate and meaningful pivots, and have real context for profitable acquisition.When I presented this premise to SmartBrief.com, the leading digital media publisher of targeted business news and information by industry, they eagerly asked me to write this article. With only minor scrutiny by their editors, it was quickly published and distributed to their 6 million senior executives, thought leaders, and industry professionals. Click here to read my article, What’s the Most You Should Pay for Customer.
In this piece, I define Customer Acquisition Cost (CAC) and how to assess it. I provide an overview of what factors go into its calculation and provide a simple example to illustrate it. It’s important to know that there are two business models to consider: one-time sales and repeat/subscription-based customers, and I provide the differences in calculating each.
Attention CMOs and Marketing Agencies
So if you’re a CMO or hold any decision-making marketing position and don’t know your Maximum Allowable Customer Acquisition Cost, I’m hopeful that my article will help you understand why this is the right method and how to change your company’s approach. If you’re an advertising or marketing agency and don’t know this metric for your client, you may be spending their money irresponsibly and wouldn’t even know it. My article will help you think differently and arm you with information to explain to your clients why this is important and get them onboard with calculating it.
Simply put, CAC-driven marketing is the only responsible approach. Anything else is incomplete and misguided.