Channels are the different ways you reach and communicate with your potential customers. These could be online or offline, paid or organic, direct or indirect. For instance, email marketing, social media, SEO, SEM, content marketing, referrals, events, webinars, cold calling and direct mail are all examples of channels. Each channel has its own unique characteristics and benefits and drawbacks; it's important to select the channels that are most aligned with your target audience, value proposition and goals.
Customer acquisition channels are the methods through which a business attracts and converts new customers. These channels serve as touchpoints between the business and potential customers, helping to create awareness, generate interest, and ultimately drive sales. Offline and Online Channel examples: • Direct Mail: Sending physical marketing materials to a highly targeted, model audience of potential customers. This is one of, if not the very best overall customer acquisition channels • SEO: Optimizing website content to rank higher in search engine results pages (SERPs). • PPC: Paid ads that appear on search engine results pages or social media platforms. • Email Marketing: Sending targeted emails to nurture leads and drive conversions.
Defining your channels—think social media, email, paid ads or organic search for example—will allow you to start calculating your customer acquisition cost (CAC) by channel. 1. Total the costs for each channel, including ad spend, salaries, and tools. 2. Count the customers acquired from each channel in the same period. 3. Divide each channel's costs by the new customers it brought in. For example, if $3,000 on Google Ads brings 60 customers, the CAC is $50. I’ve seen how channel-specific CAC insights help us optimize budgets, focusing more on high-performing channels, which led to a 20% decrease in acquisition costs in one campaign.
📊Customer Acquisition Cost (CAC) is calculated by dividing all the marketing expenses spent on acquiring more customers by the number of new customers acquired during the time period the money was spent. For example, if a company spends $1,000 on marketing in one year and earns 100 new customers during that year, their CAC is $10.
There are only two scalable acquisition channels for mass B2C products: Meta and Google. There are nuances with different programmatic platforms, there are niche cases with TikTok, but there are no other scalable channels. The key points: - For large mainstream B2C products and services, the two dominant paid advertising channels that can drive user acquisition at scale are Meta (Facebook, Instagram) and Google (Search, YouTube, Display Network). - Other programmatic ad platforms may offer additional targeting capabilities or niche reach, but cannot match the same scale. - No other digital advertising channels currently provide the same scalable reach and volume when launching and growing a mass consumer product.
It's worth remembering the offline channels - like television (both linear and CTV), direct mail, radio, and offline - also exist and can be quite usable and scalable for consumers and SMBs. (After all, people built great businesses before the internet ever existed.) With appropriate tracking, these can have great ROIs, as well as drive demand back into digital channels (eg brand search).
In order to calculate your CAC for each channel, you need to divide the total amount of money spent on that channel by the number of customers acquired from it. For example, if $1,000 is spent on email marketing and 50 customers are acquired, then the CAC for email marketing is $20. However, this calculation may not be accurate if multiple channels are used to acquire the same customer. In this case, a portion of the CAC must be attributed to each channel based on their contribution to the conversion. There are several ways to do this, such as last-click attribution (assigning the entire CAC to the last channel), first-click attribution (assigning the entire CAC to the first channel), linear attribution (distributing the CAC equally among all channels), time-decay attribution (weighting the CAC more towards channels interacted with closer to conversion), and position-based attribution (splitting between first and last channels and distributing among others). Tools such as Google Analytics or HubSpot can be used to track and measure your attribution across different channels.
At our e-grocery, we do not use the concept of CAC. Instead, we calculate the cost of acquiring a user in three dimensions for each channel and cohort: - CPI: The cost to get a user to download our app; - CPA: The cost for a user to make their first purchase or place an order in our app; - Retention to third order: The percentage of users that make a third purchase after their initial order. This leads to different dynamics: - On Meta, CPI is very low but conversion rate is so low that CPA is higher than Google; - On Google, CPA is the lowest compared to Meta, but retention to third order is lower than for users from programmatic channels.
It’s difficult to calculate CAC per channel accurately. A user has many TP before buying and you must make estimate the weight of each channel. A lot of “guesswork”, especially with a complex marketing mix. Your attribution (CAC per channel) is only as good as your assumptions. Common mistakes: - Not considering time lags (future & past effects of marketing) - Giving digital channels & BOF too much weight - Considering total acquisitions per channel when e.g. campaign spent is adjusted One way to solve this are “channel tests” (switching channels on and off) to better understand incrementality. Or asking users how they came across your brand (do users remember and can make accurate statements?) Keep in mind, CAC per channel is a proxy.
In simple terms, one can calculate the customer acquisition cost by dividing all the costs spent on acquiring more customers (marketing, advertising and promotions) by the number of customers you acquire. For example, if a company spends $1000 on marketing annually and acquires 1000 customers in the same year, its CAC is $10.00.
In order for CAC to be a useful metric, it is critical that recurring customer orders are separated from new customer orders. Seems simple but we see it constantly - acquisition costs divided by all orders over a period of time is not CAC.
Once you have calculated your CAC for each channel, you can compare them to determine which ones are more effective and efficient. You can use two main criteria to compare your CAC across different channels: Return on investment (ROI) and Customer lifetime value (CLV). A higher ROI means that you are getting more value from your investment, while a higher CLV means that you are attracting more loyal and profitable customers. Ranking your channels from the most to the least profitable can help you decide where to allocate your resources and efforts. However, some channels may have a lower ROI but a higher CLV, or vice versa. In this case, you need to consider factors such as the stage of your business, the type of product or service offered, and the behavior of customers in order to balance your short-term and long-term goals. For example, if you are a new or growing business, you may want to focus on channels that have a lower CAC and a higher ROI; if you offer a low-cost or low-commitment product or service, you may want to use channels that have a high reach and a low cost per impression; and if your customers have a short or simple decision-making process, you may want to use channels that have a high immediacy and a low friction.
Calculating CAC for each marketing channel is tricky because a customer usually interacts with many touchpoints (TP) before making a purchase, and you need to guess how important each channel was in their decision. This involves a lot of estimation, which can be even more challenging with a complex marketing mix. Your ability to figure out the CAC for each channel depends heavily on how accurate your guesses are. Problem with attribution models: - Not considering time lags (future & past effects of marketing) - Giving digital channels & BOF too much weight - Considering total acquisitions per channel when e.g. campaign spent is adjusted Remember, calculating and comparing CAC by channel is an approximation and should be treated as such.
In my experience, acquisition channel is one of the dominant determinants of downstream customer behavior - everything from churn to customer value to behavior within the product. While CAC can be easy to measure, it's important to look beyond CAC to CLV and behavior downstream. To steal a line from Charlie Munger, you can "Pay good prices for fair customers, or fair prices for good customers." In my experience, the latter works much better (and finds you with much better relationships with everyone involved.)
Estimating CAC per channel is a "guessing-game" that will favour bottom of the funnel channels and make top of the funnel investments look less profitable. The point: You can compare CAC per channel, but you have to use the results cautiously in order to make the right decisions. Attribution models just have various drawbacks that you have to be aware of. - Not considering time lags (future & past effects of marketing) - Giving digital channels & BOF too much weight - Considering total acquisitions per channel vs. increments All of this makes CAC channel comparison an exercise that can lead to bad marketing investment decisions (e.g. cutting top of the funnel).
After comparing your CAC across different channels, you may want to optimize it for each channel to improve your performance and profitability. To do this, you can test and experiment with tools like Google Optimize or Unbounce to measure the impact of changes on your CAC. Additionally, you can analyze and segment data with tools like Google Analytics or HubSpot to identify the most and least profitable segments. Furthermore, you can automate and scale processes with tools like Zapier or Mailchimp to save time and money. By optimizing your CAC for each channel, you can improve your performance and profitability.
To optimize CAC across different channels, we utilise the following types of creative analysis: - Creative content based on images - Creative colors - Headlines in creatives - Call-to-action - Language In more detail: - We test different images and visual content within our creatives to see which resonate best. - We experiment with different dominant colors in creatives to determine if certain palettes outperform others. - We iterate on ad headlines and messaging to optimise click-through rate. - We A/B test different calls-to-action within creatives to drive more conversions. - We tailor creatives for different languages and localisation.
The best way to optimize channel CAC is to stop using the parts of the channel that don't work. So mail fewer names (the less responsive ones), run fewer placements, bid on fewer keywords, and just pull back a little. After that, experimenting with offers can make a big deal - it's unlikely your customers don't understand your ad, so asking "how can I make my offering my compelling" vs "what color should this button be" can be a more effective approach.
This is cynical, but keep in mind that the most direct way to improve CAC is stop investing in the channel. This will immediately improve CAC and due to time lags you will still see acquisitions coming in! The point I am trying to make: CAC improvements are a long game and you should not over-emphasize on short term changes. This can be misleading because as soon as you invest in a channel, your CAC MUST increase because some effects are delayed (that’s just how it is, google PPC might be the only exception). Overall, marketers should focus more on channel effectiveness i.e. is the channel effective in increasing sales, before worrying about efficiency i.e. how expensive is it to acquire a customer.
This is cynical, but the most direct way to improve CAC for a channel is to stop investing in it. This will immediately improve CAC, and due to time lags, you will still see acquisitions coming in! The point I am trying to make: as soon as you invest in a channel, your CAC will most likely increase; however, if you stop investing, it will decrease. Now, should you stop investing? NO. Overall, marketers should focus more on channel effectiveness, i.e., is the channel effective in increasing sales, before worrying about efficiency, i.e., how expensive it is to acquire a customer. Once you know that your tactics are effective, you can improve efficiency by optimizing strategies, messaging and the funnel.
Finally, you need to monitor and adjust your CAC for each channel regularly to keep up with the changes in your market and customers. To do this, you can use tools such as Google Analytics or HubSpot to set and track goals, Google Data Studio or Databox to review and report data, and Google Optimize or Unbounce to experiment and iterate. This way, you can compare actual results with expected results, communicate findings and recommendations, measure the impact of experiments, and learn from successes and failures.
It's key to look at CAC per channel & attribution with a critical eye. Naturally, attribution models will put higher weight on digital channels and BOF (bottom of the funnel). The risk: If you adjust your marketing-mix strictly based on the outcomes of your attribution model, you risk not to put enough emphasis on offline channels and channels that build general awareness. This is a trend we see across the board. Brands work too much on the bottom of the funnel and not enough on brand awareness. Hence, it's a fair question to ask if "attribution obsession" is ultimately killing your brand awareness and has a negative impact on total growth. Let me know, what you think.
Personally, I use a calculator but some folk prefer an abacus or scrap of paper and a pen. LinkedIn wants me to write more so I have.
It's not only about reducing the acquisition cost. Ultimately, you want to manage the balance between CAC and CLTV (customer lifetime value) and esure that your CLTV is structurally higher. The best approach is to focus on conumer segments that bring the highest CLTV to reduce pressure on CAC. This requires a customer segmentation that allows you to understand who are your most valuable customers.
TLDR: Don't calculate CAC if you are still to hit 1M ARR, and likely you'll have to experiment more to find the one channel that you feel the momentum. Until then, leave the calculators aside.
Customer acquisition cost (CAC) in ecommerce: Channel breakdown Calculate CAC per channel: 1. Set timeframe 2. Track channel costs 3. Count new customers 4. Apply formula: Costs / New Customers But brands expect one person to: - Track all channel expenses - Analyze multi-source customer data - Handle complex attribution - Calculate CAC for every channel It's NOT realistic. One-person job? Burnout ahead. 😓 Results? Inaccurate. Winning CAC team needs: - Data analysts - Marketing specialists - CRM experts - Finance pros Stop the one-person show. A strong team = accurate CAC + smart marketing decisions. 💥