Are you spending money on marketing but not sure what's working? Here's how to calculate customer acquisition costs (CAC) and find the customers who'll keep coming back.
If you've ever looked at your marketing budget and wondered whether any of it’s working, you're not alone. Small business owners spend money on marketing and advertising without always having a clear picture of what's bringing people in. Read on for some practical ways to figure it out, including a free Customer Acquisition Tracker worksheet you can use alongside this guide.
Family-owned and operated: True Love Honey owner Anthony Tubbiolo (center) is joined by his family inside their honey warehouse facility.
|
|
He was creating a system for answering an important question for small businesses: Where do my customers come from? |
|
Knowing what it costs to bring in a new customer is one of the most useful things a small business owner can track. It tells you whether your marketing is earning its keep and where to focus when you want to grow.
Customer acquisition cost, or CAC, is how much you spend to bring in each new customer. Take your total marketing spend for a given period and divide it by the number of new customers you brought in during that same time. A business spending $500 a month on marketing that brings in 50 new customers has a CAC of $10. One bringing in five has a CAC of $100.
| HubSpot's guide to customer acquisition cost covers even more CAC concepts like lifetime value and rules of thumb for allocating your marketing budget. SCORE also has a free annual marketing budget template that can help you organize your marketing spend by channel. |
Once you have a CAC number, the next question is which specific channel produced it — a paid social ad, a flyer posted at your local coffee shop, booth space you rented at a market, a customer who told a friend? That's the harder question, and it's where a lot of marketing dollars get wasted.
For makers, food producers, and creative businesses, word of mouth is usually the strongest channel, and often the cheapest. It's hard to beat a recommendation from a person that a potential customer already trusts. And that's something to consider before you put a lot of money into paid advertising.
One thing to watch out for: Marketing and operating expenses can blur together, especially when you're wearing a lot of hats. Marketing expenses are costs directly tied to acquiring customers — ad spend, flyers, booth rentals, event fees. Operating expenses (OPEX) are the ongoing costs of running the business: salaries, rent, insurance. Your salary as a small business owner is OPEX even if you're client-facing. Keeping them separate gives you a cleaner picture of what your marketing is doing. If you're still working out what belongs in each bucket, our guide to Pricing with Confidence for Creatives can walk you through it.
One useful trick is to assign a unique identifier to each of your marketing channels. A dedicated phone number works well, as does a code word on a flyer. If your flyer says "Ask for Pete" and your Google ad says "Ask for Maria," you can count the Petes and Marias who call and trace each one back to the channel that sent them. It's not a perfect science, but it gives you good data to work with, and it costs nothing to set up.
If you sell in multiple physical locations, the same thinking applies. Track where each sale happens. Anthony scaled True Love Honey by hiring five people to staff five roadside spots and using his trusty notebook to track the sales data at each location.
|
|
Use our free Customer Acquisition Tracker worksheet to map your channels, log your spend, and calculate your CAC for the quarter. → |
|
Ask every new customer how they heard about you. In person, on an order form, in a follow-up email — wherever it fits. Tally the answers every quarter. Over time you'll see which channels are bringing people in.
For businesses with an online presence, Google Analytics can automate a lot of this tracking. It shows you which pages people land on, where they came from, and how they move through your site before making a purchase or getting in touch.
Once you know which channel is bringing in the most customers for the least money, that information will serve you well through ups and downs. When things get tight (and they usually do at some point) marketing budgets are often the first to go. But that can lead to a downward spiral — you stop investing to acquire new customers, revenue goes down, and you cut more. Knowing what's working means you know what to preserve in the face of cuts, so you don’t make a delicate financial situation even more fragile.
|
|
Anthony describes his business as a living entity with needs, like raising a child. "I started getting letters from people who were saying, 'I grew up with your honey on the table. Now I have kids and your honey is still on our table,'" he says. It takes some effort to find them, but those kinds of customers are the reason why entrepreneurship is a true love for small business owners like Anthony. |
|
Quotes excerpted from Grit and Growth: Candid Stories and Lessons for Building a Small Business with Purpose (Wiley), Chapter 3, "The Part No One Talks About: Isolation, Self-Doubt, Vulnerability, and Networks."
For more on running a sustainable creative business, visit the DreamSpring Business Resource Library.