Blended Customer Acquisition Cost (CAC) is a metric that averages the cost of acquiring new customers across all marketing channels. While it may seem appealing for its simplicity, founders and marketing teams must be aware that relying on blended CAC as a primary marketing metric can lead to amateurish and low data-driven thinking, especially when presenting results to serious investors.
This article explores the drawbacks of blended CAC and offers alternative metrics for more informed decision-making.
[…] the first mistake is to start by thinking of everything as Blended CAC – dividing all your acquisition against dollars – as opposed to understanding CAC of each channel (Facebook, Google display, Google AdWords, etc.).
Andrew Chen, General Partner at Andreessen Horowitz,
The Downside of Averaging: Blended CAC’s Blind Spots
Blended CAC can cause founders and marketing teams to overlook crucial channel-specific performance variations, resulting in obscured inefficient marketing campaigns and misallocation of marketing budgets.
For example, a company’s blended CAC might include both organic and paid customers, making the overall CAC appear extremely low. However, the reality might be that the company is paying 5-10x more for paid channel customers than for organic customers.
Let’s imagine that you spend $1,000 solely on Google Ads and generate 100 sales, of which Google Ads claims 50, and the remaining are organic. In creating a financial model, you may extrapolate this to assume that spending $2,000 would result in around 200 in sales. However, this overly simplistic approach only works in very basic forecasting models, particularly if Google Ads represents the entire advertising budget.
To precisely assess your marketing performance and efficiency, it’s crucial to scrutinize the CAC of each advertising channel instead of merely focusing on blended CAC. This approach will help you distinguish high-performing and low-performing channels, allowing you to allocate your resources more effectively.
Implementing a More Informed Marketing Metrics Strategy
To transition from blended CAC to a more sophisticated, multi-metric approach, founders and marketing teams should:
- Calculate channel-specific CAC. That being:
- (Total Cost of Channel X) / (# of Incremental Users Acquired by Channel X)
- Estimate LTV for your customers. If possible, segment them by channel of acquisition.
- LTV = (ARPU x Gross Margin %) / Churn Rate %
- ARPU (Average Revenue Per User) is the total revenue generated by that segment of customers divided by the number of customers in that segment.
- Gross Margin % is the percentage of revenue that is retained after subtracting the cost of goods sold (COGS).
- Churn Rate % is the percentage of customers who stop using your product or service over the analyzed period.
- Evaluate the profitability of customer acquisition efforts by comparing channel-specific CAC and LTV
- Optimize marketing spend based on data-driven insights
Bonus: Cohort Analysis + Channel-Specific CAC
Furthermore, cohort analysis is a potent method that empowers marketing teams to evaluate the performance of individual marketing channels at different points in time. By conducting cohort analysis, marketing teams can calculate the channel-specific cost of acquiring a customer (CAC) and pinpoint high-performing and underperforming channels and periods.
To perform cohort analysis, marketing teams first divide their customers into groups or “cohorts” based on the time they made their first purchase. They can then analyze the performance of each cohort over time to determine which marketing channels are most effective in acquiring new customers and retaining existing ones. By looking at the CAC for each cohort, marketing teams can assess the performance of individual marketing channels and identify those that are generating the highest ROI.
Conclusion
Relying on blended CAC can lead to misguided decision-making and hinder marketing performance. By embracing a more nuanced, data-driven approach that incorporates cohort analysis, channel-specific CAC, and LTV, founders can make better-informed decisions and optimize their marketing strategies. This advanced approach to marketing metrics enables founders to present a more compelling case to investors and improve overall marketing performance.
