Customer Acquisition Cost: What Is It & How Can I Improve It?
Have you ever wondered how much your customers are costing your business? As unusual as this question may sound, it’s something you should be thinking about. Yes customers give you money, but that doesn’t actually mean you’re making money.
During the journey of acquiring customers, we end up spending a lot of money on marketing and social media to get customers to give us a chance. Now this cost has a name, and it’s actually a very important KPI known as customer acquisition cost (CAC).
What is Customer Acquisition Cost?
The customer acquisition cost is basically how much it costs you to convince a customer to buy a product of service from you. The CAC includes the products costs, along with the costs of research and marketing.
This KPI is overlooked a lot of the time, despite the fact that some dub it as the “startup killer”, which says a lot.
Measuring the CAC is really important. It not only helps you calculate your return on investment but also gives you a rough guideline on how many of your business’s resources can be spent on a customer in a profitable way.
Not knowing exactly how much each customer is worth gives businesses the disadvantages of spending way too much or way too little in the process of trying to acquire more customers, let’s say you spend £100 on marketing, £300 on product costs and bring in 10 customers in one month, if they spend less than £400 in that month, you’re losing out.
Looking at your customer lifetime value and balancing your customer acquisition cost to make sure that your unit economics are right and you have a viable business model is important. This method ensures you’re not over spending on customers who aren’t going to help you break even or hit a profit. The most important reason for measuring customer acquisition costs, is that it will ultimately help you reduce costs.
Now that we’ve went over what customer acquisition cost is, and why it’s so important to measure and understand, we can talk about how to calculate it.
How To Calculate Customer Acquisition Costs
The calculation for customer acquisition cost isn’t anything super special, as a matter of fact it’s kind of easy. Here’s the formula:
Basically you divide your marketing spend over a certain period of time by the number of customers you gained in that period of time and that gives you your cost per acquisition cost.
Note: In this formula we’ve stuck with marketing spend as our costs. However, to get a true value for Cost Per Acquisition, you might want to include all the costs associated with acquiring that customer.
The calculation for cost per acquisition cost may be simple, but it can be segmented, let’s say you wanted to work out the CAC of all your Paid Advertising campaigns, you’d divide your total Advertising costs by the number of conversions or “acquisitions” you had over the time period you’re looking into.
This will help you to use budgets more effectively so you can make data driven decisions on how much to spend on which platform, making your company more cost effective.
How to improve/reduce CAC
So you’ve been given the rundown on CAC and now want to optimise it? Well if you insist. Here are some killer things you can do to optimise your customer acquisition strategy and reduce your customer acquisition costs.
Before you go around adjusting budgets and making changes, you should have a plan or a strategy that is focused on customer acquisition.
So one of the first things we need to do to reduce and improve our customer acquisitions cost is to improve our targeting. Now by this I mean we need to properly target our ideal customers that are more likely to purchase and stay loyal. This is pretty much a must have, and very obvious goal for any business.
The thing that’s not so straightforward is how you go about achieving effective customer targeting and how much better targeting can reduce your CAC.
The answer to this problem is simple – buyer profiles (aka personas).
Creating a buyer profile is the result of imagining who your ideal customer would be; their traits, what they do and what your product or service offers them are usually the questions you look at when creating a persona.
Jot down some your notes and write up a persona.
From there you can start to get personal and target customers who fit in your buyer profiles, this will bring in high quality traffic which will significantly reduce your customer acquisition costs.
Here are a few things to include in your buyer profiles that your ideal customers should have:
Motivation: your ideal customer should have a reason to purchase your product or service
Opportunity: Your ideal customers should have the opportunity to purchase your product or service, sometimes wants and needs aside opportunity can get in the way.
Repeat business: Likely to become a brand loyal customers and make potential repeat purchases.
After you’ve answered these questions you can start to imagine a customer profile and consider the above attributes, from there all you need to do is write up a questionnaire that can tailor to multiple customer attributes that are specific to your niche and that correlates with the behavioural attributes that we listed above.
Word of mouth
Word of mouth referrals is to this day one of the best and most cost effective ways to gain new customers. The reasons for this are really simple. We buy services, subscriptions and products from companies that we trust and that we personally like.
That’s why when a friends or family refer us to a company or a product that a company specifically sells we see that company is a slightly more biased way. We allow the emotional values that our friend or family member have for that business to carry over.
Essentially if someone you trust refers you to something, you’ll trust what they’ve referred you to.
As a business identifying loyal customers and giving them benefits for referring friends and family is a sure fire way to increase your customers without skyrocketing your costs, and reducing your CAC is all about reducing costs and increasing number of customers.
In the end the incentives you offer for customer referrals will highly depend on the industry you’re in, but it could be something as simple as affiliate links or discount vouchers for next purchases.
Remember your most loyal customers will be happy to share your products if they truly like your products and services, and the additional incentives will only motivate them more and appreciate the incentives you offer them.
Just try to keep the referral program simple, something that requires little bouncing between sites to appeal to newer and older customers.
Keep your customers happy
As important as acquiring new customers is, losing out your old customers can be worse than you’d ever imagine. Especially in a world where word spreads like wildfire on the internet.
Not only does it cost you more for new customers, your brand image could be ruined which would require more money spent on marketing to try and rectify the messy situation. Then you realise all of those relationships built on outreach could be in danger.
There’s a lot that can go wrong if customers get upset. That’s why it’s really important to keep them happy.
In your marketing plan include a number of different support tools to help customers with their problems and questions. Intercom, Freshdesk, Agiloft and Live chat are some of the most popular support tools out there, additionally you could have monthly or weekly feedback forms going live on your website to see how customers are doing and ensure everything is moving smoothly.
Happy customers lead to a happy business with lower customer acquisition costs.