Customer Acquisition Cost: How to track it and calculate it
Caya
August 20, 2020
  |  

Customer Acquisition Cost: How to track it and calculate it

Caya
August 20, 2020
  |  

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The backbone of Slidebean's growth has diligently and accurately tracking our customer acquisition costs.   

Our marketing strategy consists of cycles that go like this: 

  • Spend some money testing a marketing channel (usually between $500 and $1,000 for a first test). 
  • Measure how many acquisitions we get from that channel. 
  • If the numbers make sense, double the budget. 
  • Repeat until the numbers no longer work. 

Every single marketing campaign we do and continue to do is based on this premise. 

Our first successful channel was Google Search Ads. We doubled the budget until the Cost of Acquisition no longer made sense to us, then SEO, and YouTube. With this channel, we are still doubling down on our budget every month, and the numbers continue to make sense for us. 

We are now spending close to $10,000/mo in video production, but that continues to make sense because we know we are generating more than 5x that every month. 

It's really easy to track where a customer came from when you are using digital channels. Some channels, however, are much harder to measure. 

We'll go over the tactics we've used to track conversions over the years, and a few hacks that might be useful for harder-to-track channels like YouTube. 

Digital Channels

Let's start with the easy stuff. You can track conversions from Digital using Google Analytics. The platform is free, and as long as it is set up correctly, it will track all the data that you need. 

You can install Analytics by placing a short line of code on every page on your website. As soon as you do, you'll start seeing every single website visit tracked on the platform. 

I don't have time to go into every single Google Analytics feature and to be very honest, the platform is so powerful I probably don't know half of what it can do... but here are some crucial details related specifically to tracking customer acquisition and conversions. 

Google Analytics - Goals

You can find that under Admin > Goals. A Goal is quite literally a conversion. You can define that conversion when the user reaches a specific page: like a success page on your website. 

A goal may also be visiting a specific number of pages, staying on the site for a given amount of time, or Events. Analytics also has a complete conversion tracking system for an eCommerce site, which Squarespace, Shopify, and Webflow all support.  

You are probably going to be tracking your main conversion event using success pages or events. 

With a success page, all you need to do is add the URL, and Google Analytics will automatically log a conversion when that happens. 

Events are more advanced; you'll need to send event information to Google Analytics using Javascript. All events will be logged under the User Behavior section. Then, you can define a specific even to be a conversion. This should be no trouble for your dev team. 

Once you have Goals in Google Analytics, there are tons of information you can gather. For example, you can go to Landing Pages to find out which pages drive the most Goal conversion. The conversion rate will also be tracked automatically. 

You can also see which channels are driving the most Goal conversions. Channels in Google Analytics are broad traffic categories like Organic (searches), Direct (when someone types the exact URL n the browser), Social Media, Referrals (from other websites), Display Ads, Email, and so on.

Another great feature is tracking Funnels. If there are various steps needed to complete a Goal, Google Analytics will let you add those steps to the goal conversion, which will provide you with a Funnel view, that lets you see the drop off rate in different phases of the process. 

We use these Goals a lot, not only to track conversions into our platform plans, but Sign-Ups, downloads on our templates, and customers using specific features inside our presentation builder. Any 'success' event on your website should be a Goal, and you should continuously keep an eye on them, especially when you launch features. 

Google Optimize

Having your Goals set up correctly will also allow you to run free A/B tests on your pages, using Google Optimize. 

Optimize is another free tool by Google that lets you change the wording, colors, images, and even create entirely new pages and split traffic between them. 

Google Optimize then reports which of the two pages drove the most Goal Conversions, and automatically selects a winner once there's enough data to confirm which page is best. 

We try to have A/B tests running on most of our main landing pages all the time.

Goals also let you track conversions on Google Ads. You can even optimize your Google Ads towards a specific cost of acquisition. For example, you can tell Google Ads that you are willing to pay $250 for a conversion, and Google will balance the bids and the ad placement to stay within that goal. 

Now, Goals may not work for everything. For example, in our case, customers often sign up to our presentation builder from a channel, but the activation from a plan happens a couple of days later after getting a chance to try (and fall in love) with our platform. 

So the first visit may be a Referral from YouTube, but the second visit may be Direct traffic. So who gets the credit? 

Google Analytics has a feature called UserID, which I haven't had a chance to play with. So far, we've done it with different tools, such as Kissmetrics and Intercom.

Ask your users

Another fantastic way to track customer sources is by just asking your users. Whenever you upgrade your Slidebean account, we will ask the question: where did you hear about us? If you give them a simple menu with straightforward options, you can collect incredibly valuable data here. 

For example, so many customers in the past few months are coming to us after watching a YouTube video. Many of them just search for Slidebean, which means we'd generally be attributing that conversion to 'Search' when in reality, it was YouTube. 

The only way to know is by asking. Don't be afraid to ask. While extra steps in funnels are often detractors, we are making sure we ask this only after our conversion event. 

UTM Tags

Another way to track conversions accurately is using UTM tags. Google now calls this the Campaign URL Builder. 

It's a simple form provided by Google that attaches parameters to the URL, which Google Analytics can read. For example, if you are putting a link on a Medium post, you can define a custom URL to know which post is bringing the traffic. 

You can get as specific as different URLs for a different call to actions, but that's usually overkilling in my experience. 

CAC: The formula and some examples

Now let's talk about estimating CAC.

The most basic formula for CAC is dividing your marketing spend by your number of acquired customers. 

Doing this math for a paid advertising campaign or sponsorship is easy, spend divided by customers, as long as you are pretty sure about that attribution. 

This gets harder when a campaign involves the team's time. In that case, you can estimate the company cost per hour for each of the team members involved and divide it by the number of acquired customers. 

Now I also like to keep a general CAC cost number. For that, I take into account the cost of the marketing and the sales team and their operational cost. 

Operational cost is a sum of our rent, HR team, office expenses, and a fraction of my salary. I divide the total costs by the number of team members, which gives me the average overhead cost of an employee. In our case, that's around $700 per employee. 

Then, the REAL cost of acquisition is a sum of growth team salaries, overhead, ad costs, and other marketing expenses, divided by the total number of customers acquired. Again, this number is not really useful for tracking the success of one campaign or the other, but it is a fantastic indication of your business's progress. 

Historical performance is just the beginning. If you track these CAC costs correctly, you can use them to estimate future performance in your financial model. 

Our thesis for marketing is again, run tests, find out which tests are successful, and repeat. 

What we do for projections is take the effective marketing budget and project it towards the future. Experiments are not part of that budget, so as not to skew the data. 

For example, you can take the six-month average of marketing spend and the six-month average of the cost of acquisition, and project towards the future. 

Let's look at this pattern. This company has been increasing its total marketing budget by about $1,500 every month: with spikes here and there. Still, there's overall a trending increase in the cost of acquisition as the marketing budget increases. That's pretty much expected. 

We can use this trend as a variable to project towards the future. We can guess that if the marketing budget continues to increase at the same rate, the CAC will continue to do so as well... and thus, we can estimate the new number of customers we'll be getting. 

Again, this is a guess, a projection, but based on real data; and that is as good as it gets. 

One big mistake I often see is companies modeling their future growth simply based on the number of customers they expect to get every month or at the end of the year. 

The best way to model future growth, I think, is by estimating both the scale in your marketing budget, your cost of acquisition, and using that division to estimate the number of customers you bring in. 

That way, you know that if you expect to bring 10,000 new customers in your third year, you will need to spend $500,000 in marketing, unless you come up with a magic formula to decrease your acquisition costs. 

You can look at your projections in the future and estimate if the numbers are feasible, and if the cost of bringing those customers in is realistic. 

This sheet I'm using here is our Financial Model Template, by the way. We have spreadsheets built out for a bunch of different business models: eCommerce, Subscriptions, Social Media platforms... They are all available for purchase on our website, and they are included with our Founder's Edition plan. 

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