How much do you spend to ACQUIRE a customer?
This is a powerful question you should know the answer to.
In this episode, we dive into one of the KPI's (key performance indicators) in your farm business, namely Customer Acquisition Cost (CAC). I explore its significance in evaluating the efficiency of your marketing strategies and the overall health of your business. We'll break down the key components that contribute to CAC, including marketing and advertising expenses, salaries, commissions, and other direct costs. Then I'll walk through my CAC for both my CSA and my online store customer. This was an eye-opening process for me!
Your homework is to calcuate your CAC for your different key product streams. I'm hoping this will empower you to make data-driven decisions and enhance your marketing effectiveness!
This podcast was sponsored by Local Line, my preferred e-commerce platform for farmers. Are you looking for a new solution for your farm? I can't recommend it enough. Easy to use inventory management, great customer service, continuous improvement, and a culture dedicated to equipping farmers with marketing expertise, Local Line should definitely be one of the e-commerce solutions you consider as you switch. Local Line is offering a free premium feature for free for one year on top of your paid subscription. Claim your discount by signing up for a Local Line account today and using the coupon code: MDF2024. Head to my special affiliate link to get started: www.mydigitalfarmer.com/localline
Some of the resources mentioned in this episode:
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How much does it cost you to acquire a customer? I'm not talking about acquiring a lead. That's a whole other stat you should be measuring. But what is it costing you to turn them from a lead to a paying customer? This is something you should be measuring. And in today's episode, we're going to talk about how to figure that out and what to do with that data. Let's get started. Hey there, this is Corinna Bench, and welcome to the My Digital Farmer Podcast. In today's market, it's not enough to just grow your product. You've got to know how to sell it, too. Welcome to the My Digital Farmer Podcast, where we reveal online marketing strategies and tips to help farmers like you get better and more confident at marketing. Learn how to find more customers, increase your sales, and build a strong brand for your farm. Let's start the show. Welcome to episode 270 of the My Digital Farmer Podcast. I am your host, Corinna Bench, one of the farmers that shared legacy farms out in Elmore, Ohio. I'm also the founder of mydigitalfarmer.com, which is all about trying to help other farmers like you get more confident in your marketing and sales strategies so that you can grow a profitable business. How's everyone doing today? Welcome back to the show. Big shout out to all of my regular listeners, my binge listeners, and if you're new to the show, I'm really glad you're here. Welcome to the community. Make sure that you subscribe to the podcast. You're going to want to do that. And then go check out some of my back issues. You can scroll through. I've got over 250 of them now, and I'm sure you can find something there that piques your interest. If you're really new to the marketing space, though, and you need kind of a 101 crash course, I recommend that you go listen to the first 10 or even better get onto my email list because when you do, I'm going to send you a weekly email for like three months. That's going to walk you through the marketing jungle and kind of get you onboarded into what you need to know. And you can do that by going to mydigitalfarmer.com/subscribe. I get really good reviews for that, so definitely take advantage of that. Today's episode is sponsored by my friends at Local Line. Switch to Local Line and grow your farm to new heights this season. Local Line is the most comprehensive sales software built for farmers and food hubs. Its features include e-commerce, automated inventory management, subscriptions, a website builder, point of sale, and more, helping you increase your sales and streamline your processes. So whether you're a CSA farmer, you sell meat, you run a food hub, or maybe you sell wholesale or offer a herd share, Local Line has the tools and features that you need to succeed. We're a big fan. Are you looking to switch to a sales software that does it all? Subscriptions start as low as $49 a month with no set of fees or sales percentages. That's huge for me. Plus, if you join Local Line today, your onboarding manager will migrate your storefront at no cost, so you can be up and running in no time, even in the middle of the season. As a bonus, if you are a podcast listener, Local Line is also offering a free premium feature for one year with your subscription when you use my coupon code MDF 2024. So go to mydigitalfarmer.com/localline and then enter the coupon code MDF 2024. Make the switch today. And now back to the show. Well, welcome back everyone. Today, I'm going to talk about a very important KPI key performance indicator that you should be measuring in your business. And this is something called the CAC or the cost of acquiring a customer. Do you know how much it costs you to acquire a customer? Now, I'm not talking about the cost of acquiring a lead. That's a whole other metric you should be measuring. I'm talking about the cost of turning that lead into a paying client where they start actually spending money with your brand. Determining the cost of your customer acquisition is really crucial if you want to assess the efficiency of your marketing efforts and just the overall health of your business. And I thought that I would share with you how you go about even calculating it because this is something that you could do in probably under 15 minutes. And then you would have it as a benchmark, something to look at to try and beat, you know, every month as you continue to track it. Now, I have to confess that I have not done this work in a really long time. And so to prepare for this episode, I actually did the math and I found out what my numbers were. And I have to tell you, I was surprised, actually a little shocked. And it's so helpful, as I'll share with you, once I tell you what those numbers are, it's been so helpful for me because now that I see the numbers, I have a better idea of where I should be focusing and what I can be doing in terms of actions to try and increase my revenue. Like there are some very obvious decisions that I can be making here in terms of promotion that are going to make a huge impact. And hopefully I'll be able to unpack that with you when I actually walk through my numbers with you and you can see how I can see that. Hopefully my goal from this episode is that you will walk away feeling inspired to want to go figure this number out. And I know that at least for me, I've gotten very interested in the last few months for really diving into my data better, understanding what my KPIs are. We are making some business decisions now based on those numbers. How I go about marketing, what I'm choosing to focus on and give a lot of my energy to is largely based on these numbers and what they're showing me. So, without further ado, I'm going to explain how you actually calculate the cost of acquiring a customer. So, the formula is really easy. It's the total costs that you accrue to acquire the customer divided by the number of new customers that you acquired. Now, you have to set a time period that you're measuring so you can choose to do this by the month or by the year or by the quarter. I typically like to do it by the month and by the quarter. So, in that case, you would be looking at what are the total costs of my acquisition for Q1 and then divided by the number of new customers, so people who turn from a lead into a paying customer in Q1 and then you would get this number. So, what do I mean by the total costs of acquisition? What falls under that category? This is where you add up all the expenses that are related to acquiring a new customer over a specific period of time and this would include things like marketing and advertising expenses. So, what is the total amount that you spent on marketing, on advertising over the last month, over the last quarter? It would be things like any kind of digital marketing, print ads you paid for, maybe an event that you hosted that cost you money, promotions that cost you money in some capacity. It also includes salaries. So, what portion of salaries for your sales and marketing teams would you attribute to customer acquisition? If you are the marketing team, then think about how many hours do I spend on these marketing and advertising expenses and overseeing them and give yourself a good hourly wage as you think about that. Now, I wouldn't just remember there's a fraction of time and resources that you spend very specifically on customer acquisition. I know you do a lot of things in marketing. What percentage of that is actually spent on acquisition? Try to do your best to figure out what that is. Commissions might fall under this too, so if you have people who are influencers who are working for you and you give them a percentage cut for bringing a new client to you, make sure you include that as well, and any other direct costs. So, I was trying to think of some examples, like I might put like my software subscription for marketing under this category, like my email service provider, a portion of that, a percentage of that. I do put towards this cost since I have a pretty robust lead generation, I'm sorry, I have a pretty robust nurture email sequence that has a goal of turning them into a client, also a sales email sequence for my CSA that has a very specific goal of turning them into a client. It's my primary marketing channel, so I do use that as a cost, but there might also be costs for materials that you use for promotion. So, just try to wrap your head around what are all the things that I spend money on specifically to acquire the customer, to turn them into a paying customer, not just to get them as a lead. So, that to me is sort of the main categories that fall under costs of acquisition. Then, you're just looking at how many new customers did I gain during this period of time that I'm measuring. And the way that I figure that out is by going into local line, into my e-commerce platform, I run a report for the quarter or for the month, and I'm able to actually see it's in the customer tab. I'm able to see how many new customers logged on, you know, were created within local line for the first time. Now, this would be probably more difficult for you to do if you were doing everything manually, if you're just at a farmer's market booth and you're handling cash back and forth and you're not using your credit card sales or a square or anything like that. So, this might be tough for you to track, but perhaps you can give some attention to this for the next few weeks or for this next month and try to very intentionally keep track of how many new faces bought for me at the farmer's market this week and, you know, keep track of that from week to week. To get just like a ballpark figure of what this CAC KPI is, okay. So, again, the formula then would be the total cost divided by the number of new customers for that specific time period that you've chosen to measure. Today's podcast is sponsored by Farm Marketing School. This is my monthly membership where farmers can come in and build marketing assets one at a time in special 30-day build projects that I've created for you. There are currently over 14 different projects inside of Farm Marketing School, including your website homepage, building a promo calendar, building a promotional email challenge, testimonial and reviews, how to build a better offer, your email nurture sequence, your lead magnet. There's a sales funnel audit. There's a ton of good stuff in there and I'm adding new material every couple of months. Plus, you get a monthly Zoom meetup with the whole group in the middle of the month and we'll be doing some book studies off in the fall. I'm really there just to try and empower you and help you get your marketing assets built. So, the way this works is you subscribe. From month to month, you can cancel whenever you want. Go in, you take the assessment. There's also a crash course in marketing that you can watch to just learn the lingo and the vocabulary and the framework. And then you get started building your first marketing asset. Every project includes a hour long tutorial, a resource folder that gives you lots of templates and examples to help make the process of actually building your own version really fast, and also a project planner to help you time it out and make sure you get everything done. If you want to learn more about how to join farm marketing school and try it out, you can go to mydigitalfarmer.com/fms. This is my new kind of flagship offer, my community that I'm going to really be pouring myself into over the next six to twelve months. Really excited about it. So, I'd love to interact with you. Join at mydigitalfarmer.com/fms. And now, back to the show. Now, here are some other considerations as you're measuring your CAC. Consider analyzing it over different time periods, so monthly, quarterly, annually, to understand the trends and the impact of specific campaigns or even just variations that happen in our sales season. I know, for instance, with my world, we don't sell stuff from pretty much December through April. And so, that data for that time period is going to be very skewed, right? And similarly, for the months of May through early June, we don't have as much inventory available. And so, our sales are going to be way down. It's going to be less enticing for a lead to turn into a customer when they go into the store. And there's only, like, five things available for sale, right? So, there is an ideal time of the year when I can really attract a lead to turn into a customer when I've got a lot of bounty and a lot of popular things in the store. Another thing to look at is segmentation. So, calculate your cost of acquisition separately for different channels or different customer segments to pinpoint which areas are the most cost effective. So, when you're thinking about, is my email marketing where it's at or am I seeing more of the ROI coming from social media or through my influencers, right? Like, just take a look at your different marketing channels and that could help you analyze CIC. You may decide to abandon a certain marketing channel altogether because you realize that one of them is really carrying the load and doing well for you. So, you decide to just invest more resources into that marketing channel because it gives you a really good ROI. And then also look at the lifetime value, the LTV. This is really, really beneficial when we're going to do an example of this here in just a second when you look at my numbers. When you compare your CIC with the lifetime value of a customer, you want to ensure that you're not spending more to acquire a customer than they're worth over the lifetime of your business. That makes sense, right? Now, what you may notice is that it takes several months for you to recoup that investment. But if you're pretty confident, if your data is showing you that once you turn someone into a customer, they stay with you for three to five years, you can kind of run that math and still feel okay with spending the amount you're spending knowing that you're going to recoup it on the back end with that lifetime customer value. Now, here's what's really interesting. When I ran the math for me, I have sort of two buckets that I was measuring. I have my flagship offer, which is our CSA. That is 75% at least of our sales, like within our annual budget. A very small portion of our revenue comes from our online store, retail store. That's something we're trying to grow. I want to say it's 5%, maybe even less, to be honest. But we're trying to get that to be maybe more like 10%, but honestly, that's probably all we ever really want it to be. And that little piece of information right there is important as I kind of share the numbers I'm about to share with you because it should be taken into consideration as I reflect on, "Well, what do I want to do with this data and how much energy do I want to try to give towards adjusting these numbers?" Given the fact that my store best-case scenario in the future is only going to be giving me 10% of my revenue. How much time do I really want to spend on building that, right? Okay, so here's what I did. I ran my stats for, let's talk about my CSA first. My CSA's cost of acquiring a customer, turning them from a lead into a new client, is $10.66. That actually blew me away because I thought it was going to be a whole lot higher, it used to be higher, and so I was very encouraged by that. That's possible that I measured it wrong in the past, but this was the cost of acquisition here really primarily revolved around my time. So I spend a certain amount of time every month sending an email to people who are on this wait list, right? So I thought about that, but I spend the big chunk of my time here on customer acquisition when I do my early bird renewal, and when I do my CSA launch to anybody's on the wait list. So I spend a decent amount of time putting that email sequence together and creating a little promotion for it, following up with people, creating some rah-rah, energy around that launch. That's where the majority of my costs go. I don't have paper flyers or brochures really. I probably should make a few of those, honestly, but I don't have any print advertising or Facebook advertising that I'm doing for that. It's all just time that I'm spending on social media talking about it, and then time that it takes to build me that email promotion that I run once a year in November. Okay, so the average order value for a new CSA member, well, actually, I don't know that. I don't know what the average order value of a new CSA member is, but the average order value of the CSA price list is $721.70, so that's roughly two items. I would venture to guess just anecdotally that a brand new customer is probably -- most of them are just getting a vegetable share the first year, and then they upgrade the second year, but which means that the AOB is probably a little lower. But still, when you compare those numbers that I'm bringing in $700 from the CSA for every new client, and I'm only paying $10.66 to actually turn them to a customer. That is a really good return on the investment, right? I'm very happy with that $10 cost, and honestly, when I saw that, I was like, "I don't really feel like I need to do a whole lot to try to optimize that. If I just keep doing what I'm doing, I'm good." When I looked at my store stats, though, the numbers were telling a very different story, and this is actually a little bit hard for me to admit on the show, because I feel like it should be amazing at marketing since I'm somewhat of a mentor for people, but this was really eye-opening, and this is good. This is good for me to see. Last year, I'm only looking at a 12-month period, full 12-month season, and remember, we're not really in season for the whole 12 months, but my customer acquisition cost for someone who just buys from the online store from week to week was $38.60 to turn them from somebody on my leads list to actually go and buy something in the store for the first time. I did not acquire that many new customers last year for the online store for all the time that I put into it and how I was really trying to grow that. I think I only gained 25 new brand new customers. Now, our online store is only open for sale. I want to say it's 24 weeks of the season over the year that we have 24 different times that a person could even buy from the online store, and several of those early weeks, there's not a lot of product in there when we're first getting started, okay? One of the issues is that we don't have a ton of inventory available all the time for that, but anyway, that's a fair amount of money, in my opinion, for someone who's just buying whenever they want from the store. Now, the average order value, remember, I'm a vegetable farm, for a store customer is $26.78, which, again, felt a little lower than I was hoping to see. And I also was able to determine how many times a customer typically buys in that 24-week season, and the average number of times that a person will go and purchase is only six times. So that's 25% of the time that they could buy, they're buying, one out of four times. So the customer value of a store customer, for an entire year, if they only buy six times and they spend $26 each time, is $160.68, and I am paying $38.60 to acquire that customer so they can spend $160 with me. Okay, that's 20, by the way, that's 25% of the customer value is customer acquisition costs. Now, granted, once they've become a customer for the first time, then they're locked in, right? And they'll continue to buy year after year. So my true customer value on that customer is higher. It's not just $160, it's 160 times however many years they stay with me. But still, compared to what I'm making on the CSA, that's not a very good number. And I was a little bit embarrassed and a little bit surprised. Not gonna lie, especially because I have given so much energy and attention, at least I felt like I was last year, to trying to turn people into store clients. And these numbers, like really staring at these numbers has helped me see a few things that I need to pay attention to. Number one is that I have an opportunity here to encourage these store customers once they become store customers to purchase more frequently. To me, that's the greatest opportunity for growth, if I can get them to purchase even like 50% of the time that we even offer something. Right now, it's only one out of four times. If I can get them to do it one out of two times, I'm gonna double what I'm making, right, per customer. But I could also try and get the average order value to go up. And one of the ways that I could do that is that I could actually set my order minimum to be $30, right? I could set it to be a little bit higher than the $26.78 to encourage everyone to bump up. Or I could maybe say $28. I got to experiment with that because this is kind of new territory for me. But that would be another way to just inch my minimum order requirement up a little bit to encourage people to spend more every time they do go in, okay? So once you see these numbers, you can start to strategize. You can start to think, okay, my new goal this year is to get people to buy eight times or ten times instead of just six times a year. How can I do that? What kind of offers can I put together to incentivize that behavior? Or can I run a certain coupon code or a certain bundle in my store that will have a higher value that's gonna force them to have to reach that $30, $35 order minimum or what I hope would be the average order value? Are you understanding what I'm doing here? So all of this kind of came out of my little penciling out the math this week. Your numbers are gonna look really, really different and you may have a totally different opinion about what you think good numbers are, what good data is. I don't like to compare myself to other farms. I like to compare myself to my benchmarks. So now that I know what my benchmark is, I'm going to try to improve it, especially when it comes to the store. And realizing that my current customer acquisition cost, it just feels really high for what the return on that investment is. So I either have to get those people to spend more and buy more frequently to justify that cost of acquisition or I need to spend less time doing some of the marketing that I'm doing or figure out a more efficient way to acquire a customer and really drill down on what am I spending my time doing and why isn't it working as well as I would like. All right, so my challenge for you today is to use this example and see if you can try to identify what your CAC even is, what is your customer acquisition cost. That might be a little challenging for some of you, but maybe that's all you're going to do from this episode is just figure out what it is. And then for those of you who can easily do that because you've got an e-commerce platform that makes that pretty easy, sort of the next level would be okay. Now, how can I get that number to be where I want it to be? Where do you want it to be? When you compare that CAC number with what you're actually getting from a client, what their customer value is on an annual basis, you can compare those two numbers and you'll have a kind of a gut feeling on like, you know what, that's actually not a bad cost. So for some of you, if some of you might be running businesses where your annual revenue per customer, per new customer is like over $1,000, maybe it's even over $2,000 a year. And so for you, a customer acquisition cost of $38.60 wouldn't seem that bad if you're bringing in that much revenue with them, right? For me, that seems high because my annual revenue from a store customer right now is $160, like that just seems not okay with me. So you have to kind of compare the two numbers to figure out whether or not you think it's a good place, and whether you like that benchmark or whether you want to try to improve it. Okay, so that's my homework for you. Figure out what your CAC is, compare it to how much a typical customer is spending with you in a year, as well as your average order value, how much are they spending every time they come and buy from you each time at a transaction or in your online store. Compare those three numbers and that'll help you figure out where you want your CAC to move, and then you can kind of strategize what are some things that I can do to try to bring that number down if you need to. And you may not need to. You may see the number and go, "Wow, this is great!" And you can pat yourself on the back and just keep your eye on that number and make sure that it's not climbing. All right, that's all I got you guys. Thank you so much for joining me. If you want to check out my show notes, you can go to mydigitalfarmer.com/271. Now, don't forget I have tons of farm marketing tips to share with you if you join my email list. You are going to get an email from me every week for like four months and it's going to walk you through the marketing jungle. It's really good. It's free. You can unsub at any time if you start getting sick of it. Go to mydigitalfarmer.com/subscribe to get on that list. It's really, really helpful, especially if you're kind of new in the marketing space. And I'm going to be spending more time inside of farm marketing school this summer with my members talking through some of these KPIs, some of the metrics, and really helping us understand how do we evaluate those metrics? How do we use those metrics to be more strategic in our sales process? If you want to learn more about farm marketing school and how to join, I've got some fun things up my sleeve in the next few months. You can go to mydigitalfarmer.com/fms. And as a side note, I'm only going to be offering enrollment for farm marketing school on a monthly basis, like open enrollment whenever you want. For a few more months, my plan is in the fall to actually close it so that we have a period of several months where we really can form a community. So this is sort of a last chance here for the next few months to kind of hop in and hop out. I'm also on Instagram @mydigitalfarmer. I would love to connect with you there, especially in stories. And if you know somebody who would be great as a guest on the show, reach out to me at mydigitalfarmers@gmail.com. And let me know. Maybe you have a story to share. Let's see if we would be a good match. Or if you have a question that you wish that I would answer on the show, I'm looking for questions. Send me your questions because it makes great content for a short and sweet episode. Thanks so much for joining me today, guys. Have an awesome week. And I believe in you. Bye-bye. [Music] [BLANK_AUDIO]
