After a few days of discussing the theory of customer acquisition costs (CAC), it’s time to talk about reality! The real world is a confusing place, so let’s talk about some example businesses and how their CACs might be complicated by reality. Now where did I put those examples…
Example 1. Physical Goods
When selling a physical product, like basketballs, you are almost certainly going to use channel distribution partners like wholesalers and retailers. In these cases you have a choice: you can treat the channel as the customer or treat the channel as a factor in your CAC. Most companies do the latter, especially since most wholesalers and retailers require their vendors to take on inventory risk (you need to repurchase any unsold inventory). Things get even more complex when you factor in the rate of returns, since you cannot assume a customer is “acquired” if they return the product soon after purchase!
Example 2. Enterprise Software
Enterprise software is typically sold using large teams of outbound sales-people. In these companies, the majority of the customer acquisition cost is the cost of the sales-person, who makes the sale, and hence their commission on the sale (but not usually their salary), since it typically dwarfs marketing spend. You can choose to hide this cost by not making it part of your CAC, but that makes your CAC much less useful! For many enterprise software companies, the CAC is then a combination of marketing spend and sales commission.
Example 3. Mobile Apps
Mobile applications are distributed almost exclusively through advertising, which means the CAC is the easiest to calculate, since it’s just the cost of the ads required to get a user to install the app. However, if you are using multiple different ad networks and services, you will likely have different costs, so most mobile app companies measure their CACs by advertising partner and create a blended average for overall tracking.
And there you go! I’m sure you are wondering what you should do with your CAC now that you have calculated it? No worries, tomorrow we’ll discuss one of the most useful analyses you can do – customer payback!
Quote of the Day: “I reject your reality and substitute my own!” – Paul Bradford, The Dungeonmaster, 1984