Your Customer Acquisition Cost (CAC) is a key driver of a subscription business as it directly measures your ability to acquire new customers (or subscribers) for a given cost over a period of time.
Put simply, the lower your CAC the higher the margin your subscription can run at on the assumption you are also operating efficiently and working to continue to increase the Lifetime Value (LTV) of your subscriber base.
As such your CAC is something we suggest highlighting on a subscription dashboard and focusing on over time, particularly as you scale the subscriber base beyond the first ten subscribers.
Strategies For Building An Audience
Building an audience for your subscription business is a requirement to convert intenders/leads into actual customers/subscribers.
Without this audience, how will someone hear or know about your business and this offering? In todays digital world there are various ways to achieve this and we are also advocates of supporting in-person and intra-business referrals.
The below list isn’t exhaustive but will give you an overview of some of the ways you can build your own audience.
This refers to ad spend using platforms such as Google or social media such as Facebook, Instagram and others. These platforms are effective ways to target a specific audience and to be able to attribute this spend to an outcome such as a subscriber signing up to your business offering
Above The Line / Traditional Marketing
This refers to marketing spend on assets such as commercials (TV, radio), outdoor signage and also print media such as newspapers, magazines and publications that are read by your target audience
Organic Search / SEO
This refers to improving your website’s performance so that it can better rank in search engine results such as Google and Bing. By ranking better it means that potential customers searching in these engines for subscription vehicles are more likely to find your business/website and thus give you their custom
If you run a larger business or in particular, if you are operating a vehicle dealership it is likely that you may have a sales or finance department. Subscription customers can be broken into many different segments and some of these relate to customers who are waiting on a new vehicle and so need a vehicle in the interim or those who are unable to meet finance criteria for a number of reasons. These sub-segments can then be referred to your subscription offering to help build out the customer base
Email / SMS Campaign Marketing
If you have an existing contact list perhaps from previous customers, leads that have enquired or from another business you can run marketing campaigns using tools such as email and/or SMS to re-engage potential customers. This like digital marketing allows you to closely attribute the spend on these campaigns to the end goal of building your audience
How Do You Measure Your CAC?
As you can see from above, there are a number of ways for you to market to potential customers and thus acquire them for your subscription business.
The second element in building out a successful customer acquisition engine is then to measure the cost associated with acquiring your customers with a view to understanding which of your marketing spend is then the most profitable/effective.
Put simply, your CAC is the sum of all marketing spend which includes;
- Spend on marketing channels mentioned above
- The cost of all team members that are required to support marketing efforts
Then divided by the number of customers you acquire in a given time period. [Daniel - would suggest you include some graphics here to visually depict the CAC equation].
This top line CAC number is then a dollar representation of what it cost for each new customer you acquire and can be used against other subscription metrics such as Lifetime Value (LTV) to understand if your customer contributes more revenue than it cost to acquire them. In a healthy business, the LTV would exceed the CAC value as this means your customers are profitable in a gross calculation and you have the basis of something you can scale.
Of course you will need to dive deeper into the actual net profitability of the business by factoring in other operational and staff costs but it’s a usual high level metric.
There are some exceptions to the ideal state of LTV exceeding CAC however, particularly in well funded growth businesses who are seeking to quickly build out a subscription base with a view to monetising their operations better once established.
It’s worth noting that this methodology requires strong oversight and/or funding else it can represent a “leaky bucket” and ultimately drain money from the business.
Strategies To Lower Your CAC
In terms of lowering your CAC it requires diving a level deeper than the top line CAC described above which consolidates spend across all marketing channels and then brackets all new customers in the same group. In understanding how to lower your CAC we’d suggest;
- Breaking up your marketing spend by channel (e.g. digital marketing, traditional advertising)
- Attributing each new customer to a marketing channel
- Choosing an appropriate time period to measure the true CAC of each marketing channel
- Measuring the LTV of each customer by channel
This will then give you rich insight into the types of customers you can acquire via each channel, the LTV they provide and the time required to effectively run campaigns in each channel.
When we talk about the time required it’s important to note that not all marketing channels operate on the same time scale. Humans often respond well to familiarity and consistent, repeat messaging before the commit and or/express interest in a product or service. Some examples of this are below;
- For digital marketing this may mean seeing the same ad multiple times in their Google search results or Facebook/other social media feed
- For digital advertising this may mean seeing the same outdoor ad multiple times or reading successive publications which have the same or similar ad for your business
- For organic search/SEO this could mean searching multiple terms and/or doing their own research online across multiple subscription businesses before coming back another time/day to commit once they’ve had a think about which option they would like to pursue
So be sure to give each channel the appropriate time to be successful before changing tactics and potentially wasting previous spend on that particular channel,
Once you have this CAC information about each channel it’s then time to optimise your marketing spend for the channels that bring in the best LTV to CAC outcomes for your business. As a secondary insight, it can also be worth noting that some channels can become “saturated” and so increasing spend limitlessly may return diminishing outcomes. This can be particularly seen in email/SMS marketing campaigns and spend on digital marketing where there is only a “set” audience.
All in all a focus on CAC is vital to your subscription business and the business operators along with the marketing and finance teams will need to work collaboratively to enable these insights to be made available. Like with anything, these insights will require “plumbing” work to be done so that these metrics are easily retrievable and we’d suggest a strong focus on this work once you have ten subscription vehicles out.