Contributors:
Amol Ghemud Published: August 14, 2018
Summary
Know the importance of understanding the marketing portion of CAC for efficient resource allocation. Here, we detail the calculation process, which involves dividing marketing costs by the total sales and marketing costs, providing a clear picture of the financial impact of marketing efforts on customer acquisition.
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Customer Acquisition Costs (CAC) – what you pay on average to acquire new customers – is obviously pretty darn important. But knowing what portion of your total CAC relates to marketing is also really important.
This metric is called your Marketing Percentage of Customer Acquisition Cost (M%-CAC).
WHAT IS MARKETING PERCENTAGE OF CAC?
Marketing Percentage of Customer Acquisition Cost (M%CAC) is most simply defined as:
The metric that shows the marketing portion or your customer acquisition cost (CAC), calculated as a percentage of your overall CAC to reveal how much your company is spending on marketing as it relates to what you spend to acquire new customers.
Given this definition, we can see that a lower M%CAC is better than a high one.
Like some of the other cost-based metrics we’ve discussed, it’s a relatively simple formula that involves few variables.
WHY IS MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST (CAC) IS IMPORTANT?
M%CAC is important to companies executing marketing programs because it reveals the impact the marketing team’s performance and spending has on overall customer acquisition costs.
The results can help spur more strategic marketing and sales decisions.
For example, a higher MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST could mean:
Your marketing team is spending frivolously or has high overhead.
Your sales team is not performing very well, thus receiving lower or fewer commissions.
You are in a start-up/investment cycle – intentionally spending more to impact your lead volume, quality and team productivity.
HOW TO DETERMINE MARKETING PERCENTAGE OF CUSTOMER ACQUISITION COST
Now, on to the math.
Again, this is a pretty simple formula, requiring you to know the following numbers by month, quarter and year.
Marketing Cost
For marketing, this will include expenses, salaries, commissions, outside agency fees and the marketing department’s overhead; for sales, it will include sales salaries and commissions, any sales-related overhead and all of your sales expenses.
Don’t forget to include bonuses, program and advertising spend and any other relevant costs in the appropriate categories as well.
Sales & Marketing Cost
All program & ad expenses + salaries + other compensation + overhead for BOTH marketing and sales departments.
Now, to determine your M%CAC, take your Marketing Cost and divide by your total Sales & Marketing Cost (that you used to find your CAC).
Here is the Marketing percentage customer acquisition cost formula:
Let’s say that your total marketing costs came out to around $200,000 after you added in all of your expenses. Sales costs came in at $300,000. When you add those together you get a combined cost total of $500,000. Divide your $200,000 marketing cost by this $500,000 total and you get the following:
$200,000 / $500,000 = 0.4
You can then multiply this by 100 and get a M%CAC of 40%, indicating that 40% of your total CAC was spent solely on marketing.
TRACKING MARKETING % OF CUSTOMER ACQUISITION COSTCHANGES
You’re already tracking your CAC, so you can evaluate how much you spend on average to bring in a single client or customer. Tracking M%CAC is important as well, because it gives you the data you need to analyze your spending patterns. When your CAC rises, it does so for a reason, and M%CAC helps you determine what that reason is.
Whatever timeframe you use to calculate your CAC, use the same timeframe to calculate M%CAC. If you don’t, your numbers will end up skewed and your percentage won’t accurately reflect your sales/marketing split in your CAC. Make a habit of tracking your M%CAC each time you recalculate CAC. You can even add the formula to your Excel spreadsheet so that M%CAC is calculated automatically each time you calculate CAC.
USING MARKETING % OF CUSTOMER ACQUISITION FOR ANALYSIS
When CAC increases, M%CAC shows you whether the increase was a result of marketing cost increases or sales cost increases.
An increase in M%CAC shows that the balance between marketing and sales costs has shifted in favor of marketing; it means that your CAC went up because you’re spending more on marketing than you used to. Likewise, a M%CAC decrease shows that the balance shifted in favor of sales and sales costs are going up.
Before you take drastic action, however, make sure that your company isn’t currently in an investment cycle. Investment costs can also drive up CAC, and slashing budgets during an investment cycle just results in your business suffering from a lack of much-needed funds for marketing and sales.
If you’re just starting out or you need to overhaul your existing marketing strategy, make sure to familiarize yourself with these 7 important marketing metrics.
Of course, if CAC goes down then M%CAC is used to show which department has experienced increased efficiency during the tracking period. A decreased M%CAC shows marketing costs going down, while an increased M%CAC shows sales costs dropping.
CONCLUSION
Analyzing CAC and M%CAC gives you a lot of information on how efficiently your sales and marketing teams are using their available funding. Keeping an eye on the metrics and their associated trends will show you where you’re overspending and possibly where you’re under-spending as well, giving you an opportunity to change your spending patterns moving forward.
This insight will not only ensure that your company is operating efficiently, but you’ll also save money that can be used for greater investments down the road.
FAQ
1. What does CAC mean in marketing?
consumer acquisition cost, or CAC, is the price associated with gaining a new consumer. The CAC, a crucial business metric, is the total of all costs associated with sales and marketing, as well as any property or equipment required to persuade a client to purchase a good or service.
2. How is CAC calculated in marketing?
The CAC of a company is determined by splitting all sales and marketing expenses by the number of new customers acquired during a given time frame. For instance, Tommy’s acquisition cost for that week would be $1.00 if he spent $10 on marketing his lemonade stands and sold his product to 10 individuals in a single week.
3. What are CAC and LTV in marketing?
The average revenue a single client is expected to produce over their account is known as lifetime value (LTV), also known as customer lifetime value. The average cost of acquiring one client is the customer acquisition cost (CAC).
4. What is CAC used for?
A CAC is necessary to enter government buildings and computer networks and serves as an ID card. A CAC has an embedded microchip that allows email encryption, cryptographic signing, and public key infrastructure (PKI) authentication tools. It is roughly the size of a regular debit card.
5. What is a good CAC?
What is a desirable CAC: LTV Ratio? The LTV/CAC ratio should ideally be 3:1, meaning you should earn three times as much as you would have to spend to acquire a customer. Your company is sending a smoke warning if your LTV/CAC is less than 3!
Amol has helped catalyse business growth with his strategic & data-driven methodologies. With a decade of experience in the field of marketing, he has donned multiple hats, from channel optimization, data analytics and creative brand positioning to growth engineering and sales.
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