Today, we’re bringing you an in-depth guide to explain the what, how and why behind Customer Acquisition Cost, as well as effective strategies that can help you lower it AND make it a more efficient metric.
What IS Customer Acquisition Cost?
In short, it’s the amount of money you pay to “convince” consumers that your product is right for them. From ads to SEO, it will eventually begin to add up, so keeping it at the lowest cost possible is important if you want to grow and succeed as a business.
This is one of the more important business metrics for companies seeking to expand their growth. However, it isn’t something that should stand alone, but rather alongside other important company data. Things like Return on Investment, (ROI) and customer value can play a very deciding role in trying to determine whether your CAC is too high or just appearing that way.
Customer Acquisition Cost can be murder. Did you know that over 30% of new companies fail within the first two years and 50% within the first five years of business? And it’s all because getting new customers can be one of the most costly business expenses. Crazy, right??
To avoid being driven into the ground by your CAC, there’s one thing you have to keep in mind:
Your CAC should NEVER be higher than your Customer Lifetime Value. And if you can stay on top of that, you have a better chance of not being in the 50% of failing companies thanks to rising CAC and a low CLV.
How Do I Calculate My CAC?
We won’t pull you down with too many complicated formulas, don’t worry. But you’ll need three things to accurately calculate your CAC:
- Total # of Customers
- Total Marketing Cost
- Total Sales Cost
Let’s say you run an online apparel business and that your total number of customers is somewhere around 320 people a month. As a growing business, you don’t have much money to spend on marketing, but you do what you can, which ends up being around $900 a month. Each customer, on average, spends about $30-$40 a month on the site, which means you’ll be making about $11,200 a month. Remember, though. Your marketing and sales cost has to factor in things like salaries for your marketing and sales employees, software, (Think CRM) equipment, third party consultants, advertising, price discounting, events and sponsorship's.
So knowing all this, we can calculate our CAC like this:
(The sum total of all sales and marketing expenses) / (Number of customers acquired). In this case, our CAC is around $37.
There are other important factors to keep in mind, however. Things like the number of customers in total versus the number of recurring customers, your current revenue and the effectiveness of your marketing strategies.
There is no perfect calculation strategy, but this will help you get a ballpark number that can help keep you on the right track.
How Can I Effectively Lower My CAC?
The short version: Your Customer Acquisition is high because acquiring new customers is hard. And, let’s face it: Expensive. However, there are ways to effectively lower your CAC without blowing more money and wasting more time.
The very first step you can take is making sure your leads are warm before moving in for the kill.
A warm lead may have done business with you before or is already well aware of what you can give them and how it can benefit their company. They’re much more likely to give you either a “yes” or “no” from the outset, rather than having to be convinced of the reasons why your service or product can benefit them. And that’s why cold calling should never be a primary sales tactic.
Personalizing your sales through inbound marketing is a great way to drive your customer acquisition cost significantly lower. Prospects don’t want to be sold to or convinced, they want to have a conversation about how you can help them and want you to listen to their concerns and help them troubleshoot to find out what they really need. So if you want to drive your CAC lower, you’re going to have to get conversational and drive those sales in a way that’s a little less...sales-y.
Finding out what the lifetime customer value is for your clients can be helpful in finding out how much money you should be aiming to spend on a client. If you’re spending more than you’re bringing in, it’s time to re-evaluate and get your hands dirty.
Do you have any special tips and tricks when it comes to lowering your customer acquisition cost? We’d love to hear your feedback in the comments!
Your Comments :