Managing a marketing budget effectively requires you to watch and manage many different metrics.
One of the most important metrics is Customer Acquisition Costs.
Customer Acquisition Cost (CAC) tells you how much it costs to acquire an average customer through a channel, department, campaign or any other activity.
How to calculate Customer Acquisition Cost
Calculating customer acquisition cost is simple and effective. Start by using the following affiliate customer acquisition cost formula:
Marketing Costs (MC) / Number of Customers or Orders Acquired (CA) = Customer Acquisition Cost (CAC)
For e-commerce retailers we divide all the sales and marketing costs by the number of customers or orders.
Others may choose to use customers or households as they feel that more accurately reflects their CAC, but the simple way to calculate CAC is by orders.
What are included in the Sales and Marketing costs?
- Affiliate Commissions
- Affiliate paid placements or inclusion fees
- Network technology fees (Impact Radius, Partnerize, LinkConnector, ShareASale, CJ, Awin, AvantLink, Pepperjam, Rakuten etc)
- Agency fees
- Affiliate bonuses
- Swag sent to affiliates
- And sometimes your marketing team’s internal costs, but not too often
- And any other fees directly related to the promotion of your products on affiliates’ sites
Once you have all those costs you divide by the number of orders. Make sure your costs and your orders are from the same time period. Track this on a monthly basis.
What is a good CAC target?
Each industry and organization is drastically different. You may be able to find industry associations that have this data for your industry.
To find out what a good CAC target is you will need to create a company benchmark.
Setting a Benchmark for Affiliate customer acquisitions costs:
- Benchmark Your Affiliate Channel’s CAC
What was last year’s CAC, this month last year and this quarter last year. Track this number each month. It may help you compare weekly numbers until you get a handle on it.
- Track CAC by Affiliate Partner
You may find your highest producer is also your most costly. Look at CAC by affiliate and you’ll be able to see if you need to renegotiate with affiliates or spend more money with others.
- Compare All Marketing Channels
Get data on the other channels at your company. What are their CAC and what are their goals for the year and current quarter?
When you start looking at data across individual affiliate partners, categories of affiliates and the channel as a whole, your strategies to reduce customer acquisition costs will change.
You will get a clearer picture of who is really producing margin and net profit for you, your channel and your organization.
You get a clearer sense of how effective and efficient your marketing dollars are being used and which affiliate partners, and categories of partners you should be spending more time and money on.
It’s a great way to ensure you are as efficient or more efficient than other channels.
My dad always said, you treasure what you measure. Make sure you are treasuring the right things!
What if My CAC is too High?
During your CAC audit if you find that:
- Compared to other digital and offline channels your CAC is much higher in the affiliate channel
- You are overspending your budget
- You are seeing wild fluctuations across partners and categories in your CAC and ROAS
The affiliate channel can lower your CAC by allowing you to better target your spend on partners and campaigns that return the most customer for the least amount of money.