Win More Specifications with Less Marketing Spend by Understanding Your CAC

Do you know how much each new customer / project costs you, in terms of your sales and marketing efforts?

Understanding how much it costs you to acquire customers (or projects) should be a fundamental aspect of your sales and marketing efforts.

At it’s core, it’s about continually optimising to acquire the same quantity, quality and value of customers for less money.

But from experience, I don’t believe Customer Acquisition Cost (CAC) is a metric that many building product companies pay active attention to.

Or perhaps it’s not fully understood.

And within an industry which traditionally operates on razor thin margins, understanding and optimising this could be a key competitive advantage, particularly as we find ourselves in less than ideal market conditions.

Just a couple of weeks ago, the Construction Products Association released their State of Trade Survey for 2018 Q1, which states:

“Manufacturers anticipate a return to growth in the coming quarters, but rising costs continue to act as a headwind. 90% of heavy side manufacturers and 84% of those on the light side reported a rise in raw materials costs in Q1, whilst the same proportions reported an increase in wages and salaries. In addition,fuel costs rose for 90% of heavy side manufacturers.”

In addition to that:

“Annual cost increases were reported by 90% of manufacturers on the heavy side and 79% on the light side”

“68% of heavy side manufacturers and 67% of light side manufacturers anticipate a rise in costs over the next 12 months.”

These rising costs to manufacture products, across raw materials, labour and energy, will hurt most companies. So many will (or should) be thinking hard about offsetting that in order to at least maintain existing profit margins.

The most obvious reaction may be to raise prices. Or perhaps to make cut backs on “luxuries” throughout the office.

But another way, which many will overlook, is reducing your direct Customer Acquisition Costs (CAC).

Customer Acquisition Costs

From Wikipedia:

“Customer Acquisition Cost is the cost associated in convincing a customer to buy a product/service.

This cost is incurred by the organization to convince a potential customer. This is an important business metric. It plays a major role in calculating the value of the customer to the company and the resulting return on investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer.

In general terms, it helps to decide the worth of the customer to the company.”

In other words, sales and marketing.

As a very simplified example, if you spent £100,000 on marketing your products last year, and acquired 50 new customers / projects, then your Customer Acquisition Cost is £2,000.

Whether this is good or not depends on how much a customer is worth to you on average, what the average lifetime value of a customer is and how much profit you make on each order.

Reducing CAC

The chances are, like most building product companies, you are still investing most of your budget into very expensive, ‘brand marketing’ channels (trade shows, magazines, print literature, traditional PR etc.).

If this is the case you’ll find there is a lot of room to drive down those Customer Acquisition Costs.

Expensive, inefficient marketing channels and activities drive your CAC up to uncomfortable levels, so it’s important to understand the CAC for each marketing channel you use, not just the overall measure (like the £100,000 to acquire 50 customers example above).

Ideally, you want to identify the marketing channels and activities which are having a negative impact and cut back or replace them with channels which can help to drive CAC down (most likely, online channels).

We are all guilty of only looking at high-level results, and making judgements on performance. So it’s worthwhile to really spend some time looking at exactly where your marketing budget is being attributed, and breaking down the exact return you get from each channel.

An Illustrated Example

As an example of CAC in action (based on a real life scenario), consider a building product company who have an annual marketing budget of £250,000 per year.

10% of this is set aside for online, digital activities, the rest is for offline activities, mainly trade shows and magazine advertising (so £25,000 for online vs £225,000 for offline).

Their digital marketing manager has run the numbers and has evidence to show that leads generated through online, digital channels (such as SpecifiedBy), cost around 1/8th of the cost per lead via trade shows and magazine advertising, and convert at roughly the same rate and at the same average deal size.

So their Customer Acquisition Cost through trade shows is approx. 8X higher than through SpecifiedBy and other digital channels.

That can easily be the difference between making a loss and making a profit.

To reduce their CAC, this company could reduce their marketing budget for offline activities to just £28,125, spend that on additional digital marketing channels instead, and achieve the same number of leads and sales as before.

Reducing their total marketing spend from £250,000 to just £53,125 (a ~79% saving).

(NOTE: If the company wasn’t concerned with reducing their budget, they could also choose to invest the whole £225,000 they spend on Trade Shows and magazines into digital channels, and they could multiply their leads and sales pipeline by 8x, with the same budget.)

Either way, that would make a huge difference to most companies.

But they don’t.

And the reason they don’t is that they are not looking at the Customer Acquisition Costs. They are simply looking at outputs.

To explain this, lets assume:

• the £25,000 spent on digital channels results in 1,000 new leads (=£25 per lead)

As we know, the cost per lead for online was calculated as 8x cheaper than offline, so the cost per lead there was £200. This means…

• the £225,000 spent on offline channels results in 1,125 new leads

If leads from both channels convert at 15% with an average order value of £1,500, then they will have generated:

• Orders of £225,000 from online, digital channels
• Orders of £253,125 from trade shows and magazine advertising

If someone, like an MD for example, was simply looking at these high-level numbers as they are, they would correctly conclude that offline marketing channels are bringing in most of the revenue.

They would even be forgiven for concluding that offline marketing is the better, more successful option and that as a company, they should focus more resources on that.

Equally, if the company looks at their marketing budget and their marketing efforts as a whole, they would see:

• Budget spent= £250,000
• Revenue generated = £478,125

Again, this high-level view would suggest that everything looks good. And everyone could easily agree that we should “keep doing what we’re doing”.

But looking at the Customer Acquisition Costs tells the true story:

• For digital channels, CAC = ~£167 (£25,000 spend / 150 customers)
• For offline channels, CAC = ~£1331 (£225,000 spend / 169 customers)

When presented with this information, the conclusions would have to be very different.

It would be clear that this company can make more profit per customer / project and ultimately acquire more customers with the same (or less) resources, by focusing more on the digital channels they are using.

And it would be clear that continuing to invest in traditional channels with higher Customer Acquisition Costs could be a huge, costly mistake.

By doing a bit of research into this, you can stay well ahead of the rising costs of materials and labour, and get more value out of your marketing budget.

Note: This is a very simplified example to illustrate the importance of CAC. In reality, within the broad split of online vs offline marketing channels, there will be certain activities which perform better than others.

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Thanks for reading. I’m the founder here at SpecifiedBy — we’re solving the misalignment between the way architects and specifiers search for building products, and how building product companies market and sell to them.

Do you know how much each customer or project costs you to acquire?

If you have any questions, or thoughts to share, please post them in the comments, and if you liked this article, please give it a clap and a share. It’s much appreciated.

For a free, 1:1 online demonstration of how this could help your building product company reduce your CAC and reach over 50,000 architects, contractors and specifiers each month, book a time that suits here.