Growing your business is a mix of selling more to the customers you already have, and selling to new customers. So how do you check that you are recruiting new customers profitably and how do you improve your results?
What is your Customer Acquisition Cost?
Your Customer Acquisition Cost (CAC) is the total of marketing costs spent acquiring new customers divided by the number of customers you actually acquire.
So, if you spent £5,000 on customer acquisition marketing in a month
and you won 50 new customers,
your CAC would be £100.
If you run a variety of marketing channels, it’s good practise to calculate your CAC by channel, so you can see how hard your Paid Search Campaigns are working for you when compared to your Social Media campaigns for example.
It is important to note that your CAC will vary depending on your industry, target audience, and marketing channels. Some businesses include costs which are not directly attributable such as rent, software licences and members of senior management, so always take care to understand the calculation used before comparing CAC between businesses.
The important factor is to monitor your own Customer Acquisition Cost and to pro-actively adjust your strategy accordingly. Depending on the complexity of your business, you can monitor CAC in a spreadsheet, or using a tool such as this one from Sweet Analytics.
Why is adjusting your Customer Acquisition Cost important?
CAC helps you measure the effectiveness of your marketing and sales efforts. By tracking the cost of acquiring a new customer, you can analyse which channels and tactics are most successful in bringing in new business. This data can then be used to optimize your marketing and sales strategies and allocate your resources more effectively.
For example, if you find that your social media ads are driving a high CAC, you may want to shift your budget to focus on other channels that are more cost-effective.
Secondly, CAC is a key component of your overall profitability. If your CAC is too high, it can eat into your profit margins and make it difficult to sustain your business in the long run. By keeping a close eye on your CAC, you can ensure that you are bringing in customers at a cost that allows you to maintain a healthy bottom line.
Finally, understanding your CAC can help you make informed decisions about pricing and customer retention. By knowing the cost of acquiring a new customer, you can set pricing that takes into account your marketing and sales expenses, while still remaining competitive in your market.
What is a good Customer Acquisition Cost?
The answer varies from business to business depending on the average profitability of customers acquired.
Consider the difference between :
A new customer who buys once at an order value of £1,000
A new customer who stays with you for 3 years, spending £25 a week, so orders totalling £3,900
So, to give a rounded interpretation of customer acquisition performance, we need to take into account customer lifetime value (CLV).
In simple terms, CLV is the total amount of money that a customer is likely to spend with a business over the course of their relationship.
Let’s take an example to understand this better…
A business’s average transaction value is £200 at 50% margin, so £100 gross profit
The average customer buys a product three times a year
The average customer stays with the business for five years
CLV = £1,500 (£100 x 3 x 5)
This means that the business can afford to spend up to £1,500 to acquire and retain this customer in order to break even.
Knowing the CLV of your customers also allows you to identify your most valuable customers. These are the customers who spend the most money, are most loyal and refer others to your business. By identifying these customers, you can develop strategies to retain them and encourage them to spend more.
There are several factors that can impact the CLV of a customer. These include the frequency of purchase, the average order value, the length of time a customer stays with the business, and the cost of acquiring and retaining customers. It is important for businesses to track these factors and make adjustments to their strategies accordingly.
5 Tips for lowering Customer Acquisition Cost
1. Focus on your target audience
One of the easiest ways to reduce your CAC is to focus on your target audience. Understanding your target audience means you know their needs, preferences, and behaviours. By knowing this information, you can create targeted marketing campaigns that resonate with your audience. Targeted campaigns are more effective than generic campaigns because they speak directly to your audience, resulting in a higher conversion rate and a lower CAC.
2. Optimize your website
Your website is the first impression potential customers have of your business. Therefore, it’s crucial to optimize your website to ensure a positive user experience. Ensure that your website is mobile-friendly, loads quickly, and has easy navigation. A well-optimized website creates a good first impression, which can lead to a higher conversion rate and a lower CAC.
3. Leverage social media
Social media is a powerful tool for businesses to connect with potential customers. By leveraging social media, you can reach a wider audience and increase brand awareness. Ensure that you’re active on social media and engage with your followers. Also, consider running social media ads to reach a more targeted audience. Social media ads are cost-effective and can result in a lower CAC.
4. Offer incentives
Incentives are a great way to attract new customers and reduce your CAC. Consider offering a discount or free trial to entice potential customers to try your product or service. When customers see the value in your product or service, they’re more likely to convert into paying customers. Offering incentives can also lead to customer loyalty, resulting in repeat business and a lower CAC.
5. Referral program
A referral program is an effective way to acquire new customers through word-of-mouth marketing. Encourage your existing customers to refer their friends and family to your business by offering an incentive for each referral. Referral marketing is a cost-effective way to acquire new customers and can result in a lower CAC.
5 Tips for increasing Customer Lifetime Value
1. Offer exceptional customer service
One of the most important factors in improving CLV is offering exceptional customer service. Customers want to feel appreciated and valued, and they will continue to do business with you if they feel that you are providing them with the best possible experience. Make sure that your customer service team is friendly, knowledgeable, and responsive to customer needs.
2. Personalize the customer experience
Personalizing the customer experience is another great way to improve customer lifetime value. Customers are more likely to continue doing business with you if they feel that you understand their needs and preferences. Use (GDPR compliant) customer data to personalize marketing messages, recommend products or services, and offer special deals or promotions based on their past purchases.
3. Encourage customer feedback
Encouraging customer feedback is another important way to improve CLV. Customers want to see that their opinions matter, and they appreciate businesses that are willing to listen to them. Use customer feedback to improve your products or services, identify areas for growth, and make changes that will benefit your customers.
4. Offer loyalty rewards
Offering loyalty rewards is an effective way to improve customer lifetime value. Customers appreciate businesses that show their appreciation for their loyalty. Offer discounts, special promotions, or exclusive access to events or products to customers who have been with your business for a certain period of time or who have made a certain number of purchases.
5. Stay engaged with customers
Staying engaged with customers is another important way to improve customer lifetime value. Use social media, email marketing, or other forms of communication to keep your customers informed about new products or services, special deals or promotions, or company news. Engage with customers by responding to their comments or questions, and show that you are interested in building a long-term relationship with them.
Understanding your Customer Acquisition Costs and how they relate to your Customer Lifetime Value is a critical measure of your business health.
At a more granular level, comparing results for each of your marketing channels will help you focus your spend on the most profitable marketing channels and customer groups.
In the end it’s pretty simple – in the words of Jay Abraham :
- Get more buyers
- Enhance the value of each sale
- Encourage existing buyers to buy more often
If this topic has piqued your interest and you’d like a chat about improving your CAC and CLV in relation to your digital marketing channels, drop us a note!