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Customer Acquisition Cost: How to Budget for Inbound Marketing Growth

[fa icon="calendar"] November 16, 2015 - Fred Thompson

Business people celebrating: Customer Acquisition Cost help to budget for inbound marketing growth

Capturing leads from your marketing is good. Using inbound to capture leads while generating positive ROI is much better. But being able to plan for growth that generates positive ROI ahead of time—before you spend a dime is cause for celebration.

Marketing customer acquisition cost (M-CAC) is one metric every marketer and CEO should have in their tool belt. M-CAC (or just CAC), cost per lead (CPL), and lifetime customer value (LTV) can be used to tell you how you’re doing now and if you can afford to budget for future inbound marketing growth. In all, there are six key metrics that, if you know them, will make you a hero in everyone's eyes. Find out more here.

To grow, you’ll get the most bang for the buck from inbound. In fact, inbound leads cost an average of 61% less than leads acquired from traditional marketing. This statistic has remained more or less constant over the past several years.Inbound procuces 61% better marketing ROI than outbound: Customer Acquisition Cost help to budget for inbound marketing growth

The graphic above was taken from Hubspot’s State of Inbound 2015 report. You can download the entire 71 page report here.

What is M-CAC?

Customer acquisition cost is simply the money you spend to acquire one customer. To calculate M-CAC, simply divide your total annual spend on marketing by the number of new customers you acquired.

M-CAC = Total marketing spend / number of new customers

The key to understanding M-CAC lies in the word "acquisition." Acquistion is any work you or any of your employees do or spend to acquire new customers. This includes printing, advertising, website expenses, and fully-loaded FTEs. It does not include referral customers because you didn't directly do any work or spend any money to acquire them.

Calculating M-CAC by Channel

What if you have some marketing channels that are performing better than others? Wouldn’t you want to pour more resources into those channels and less into the poorly performing ones? Yes, of course you would. If you’re in a highly competitive market, not tracking these metrics could really cost you.

Tracking M-CAC by channel can be challenging. For one thing, some channels are hard if not impossible to track. Take a billboard, for example. Even if you put a dedicated phone number on a billboard, you have no idea who is acting or not acting on those impressions you’re creating. But anything digital can be tracked and tracked well. One of Hubspot’s newer integrations even tracks PPC as it relates to inbound campaigns.

Using M-CAC to Budget for Inbound Marketing

To see exactly how you’re doing and to plan for future customer acquisition you need to compare M-CAC with LTV and apply them against growth goals. Let’s first look at a real company as an example.

Bazooka Software (not their real name) is a two-year-old SaaS software development company just immerging from startup mode.

LTV

Bazooka’s average customer spends $200 per month on their software. The company estimates that each customer will stay with them for at least 3 years. That's $7,200. Applying their gross margin of 40%, their LTV is $2,880.

M-CAC

Bazooka pays its one-person marketing team $80,000 per year (fully loaded FTE). They spend an additional $30,000 on conferences, advertising, business software, etc. From these efforts, this past year they acquired 200 new customers. Their total M-CAC thus is $550.

Comparing their M-CAC of $550 with their LTV of $2,880, their positive marketing ROI is just over 500%. Not bad!

GOALS

Bazooka is thinking of investing in inbound marketing. They’d like to acquire 10 new customers per month through inbound, but are not sure how they should budget for this cost. Even through they're confident inbound will produce even greater marketing ROI, they'd still like a heads-up on some numbers.

Currently, they are doing no inbound. While they have a good website, they have no conversion paths, no calls-to-actions, no landing pages, their blogging is messed up, and their social networking is sporadic.

BUDGET

Using M-CAC to plan for budget is easy. Their current cost to acquire one customer is $550. 10 customers would cost $5,500. And there’s the budget: $5,500 per month. But you might way, “Yikes, that’s a lot of money!” But that budget would delever $28,800 worth of revenue (10 X LTV) per month. How does that sound?

Conclusion

Using M-CAC to Budget for Inbound Marketing Planning for inbound marketing is a good risk in general because national averages from all verticals show great success across the board. Using metrics to budget plan removes the question of success out of the equation and will enable you to move forward or to secure the budget you need in advance.


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Topics: Construction Marketing

Fred Thompson

Written by Fred Thompson

Fred Thompson is the owner of New Destiny Media; Fred loves working side-by-side with business owners to create successful marketing campaigns that grown their business. When Fred is not working, he is spending time with his three very active children at home. He is an avid problem solver (MacGyver), Loves anything Martial Arts related and Social Media gets him excited about work.