A business is a flourishing business only until it has a regular inflow of customers. Traditionally, shotgun marketing was enough for companies to find new customers.
But the time has changed now.
Companies use highly targeted marketing campaigns to reach new customers every day. They use their best resources to track their leads as they progress through the sales funnels to become loyal customers.
However, it comes at a price. There is a customer acquisition cost associated with it. Any company’s target is to have lower customer acquisition cost (CAC) and high customer lifetime value (CLV) to operate optimally. In fact, companies with lower CAC than customer lifetime value are more profitable.
Let’s discuss CAC in detail and the ways to reduce it.
1. What is Customer Acquisition Cost (CAC)?
Imagine you roll out a marketing campaign that includes social media marketing, online advertisements, and content marketing strategies. Need not to mention, it costs you money. Every penny you pour into converting your leads into loyal customers sums up your customer acquisition cost (CAC).
To break it down, CAC is the total expense of acquiring a single customer. It includes salaries of marketers or salespeople, ad spending, marketing costs, and the money spent on promotional events.
It’s crucial to know your CAC because it directly impacts your overall profitability. You get to know how much you must earn from each customer to become profitable. Put simply. If you are spending more money on persuading customers to buy from you than what they spend on your product or service, you are at a loss.
CAC varies from company to company depending on the prices of products and services offered. For instance, it will cost more to acquire corporate customers than to get an individual customer. Also, different ways of convincing work for different customers. The stats say that a 10% reduction in CAC can lead to a 23% increase in profit.
1.1. What is Included in CAC?
CAC takes into account all the direct and indirect costs of your marketing and sales teams that go into acquiring new customers. So, while calculating your customer acquisition cost, you must include:
There can be other costs too that may vary as per your business. So, try to include everything that you think is being spent on acquiring new customers.
1.2. Why is Customer Acquisition Cost So Important for Your Business?
Knowing CAC can help businesses measure the success of a new product, service, or initiative as it is related to all the expenses incurred by a business.
Brand managers can also plan the future on the basis of CAC. The costs can help determine whether they should launch a sales promotion or campaign for new customers or not. They can also plan their budgets and discover ways to allocate their money.
1.3. How to Calculate Customer Acquisition Cost?
You can use a standard CAC formula to calculate customer acquisition costs. All you have to do is divide all the costs spent on acquiring customers over a given period of time by the total number of customers acquired over that period of time.
For example, if your company spends INR 1000 annually on acquiring 100 customers, then your CAC would be INR 10.
2. How to Reduce Your Customer Acquisition Cost?
Knowledge of CAC is crucial for measuring and maintaining the profitability of your business. Your business cannot be viable if your CAC is higher than CLV. As a rule of thumb, don’t spend more than 33% of your average customer lifetime value.
Let’s now take a look at a few ways to reduce your CAC and enhance your profit.
2.1. Ensure You’re Selling to the Right Audiences
Your marketing strategies and resources should be focused on the right audiences. It’s essential to determine the needs and pain points of your customers. This will help you outline the audience that wants your products and services. You must develop in-depth buyer personas to better comprehend and target your audience. This way you can engage with them on the best terms.
For instance, you will have to use different content to target a user who is already using your product than what you will use to target a new customer.
Modern customer looks for brands that can provide them with unique and personalized experiences. At the same time, it may seem like a challenge to provide your target audience with the right information and content. Creating ideal customer profiles can help. Use strategies like buyer personas to give clear targets that will benefit your new customers.
2.2. Accurately Track Customers
Accurate tracking is crucial for reducing CAC. You must properly track the source, channel, or campaign of your traffic. Aimlessly sending users to your landing page won’t do any good. Instead, set up conversion tracking within each platform. This will help you optimize your campaigns in accordance with your customers.
Consider using forms on the landing pages or creating UTM parameters to determine the performance of different landing pages and campaigns. Also, use paid advertising for leads within your pipeline.
2.3. Retarget Customers
Retargeting is a great way for companies to stay in the eyes of their potential customers. It happens many times that customers leave incomplete actions on websites and applications. There can be a number of reasons for people to not buy from a company. Sometimes, all it takes is a gentle reminder to encourage the customer to complete their purchase from where they left off.
With retargeting businesses can convince customers to reconsider their brand and the value they offer. It also helps companies generate highly targeted campaigns for their prospective customers.
So, if you want to retarget your audience, make sure to gather as much data about your customers as you can. Determine their behaviors, motivations, and preferences to retarget and convince them to buy from you.
2.4. Align your Ads Properly
It’s obvious that the leads you acquire through a demo request have more chances of converting into paying customers than the leads that you acquired through a PDF download. For instance, an advertisement promoting a free trial of a CRM platform can perform well for users who are looking for customer relationship management tips.
There are still many businesses that think that they can target prospects with bottom-funnel promotions entirely. This may work in some cases but most businesses will see a high rise in their customer acquisition cost. It’s best to spend money on offers that are more likely to get you customers at different stages.
2.5. Optimize Landing Pages
The website experience you offer to your customers has to be the best. There has to be a link between what you are marketing and what your landing pages tell. The image line and content story should communicate the exact same message.
The design of the landing page should be clean and easy to navigate. It should clearly communicate the value proposition of your product or service. It shouldn’t take much time for the visitors to understand what your brand offers and how it can benefit them.
This won’t just help you build trust among your customers but will also lower your customer acquisition cost and increase your conversion rates.
2.6. Use Organic Marketing
Organic marketing options like SEO, email marketing, and referral marketing work great in attracting customers to your business website. In a world where 67% of marketers believe their CAC is too high, this can help you overlook costs that are associated with other types of paid marketing.
As a business trying to reduce CAC, you must develop content that shares value with your customers and helps you position your brand as an authority in your industry. Talk about your customer’s pain points and what they are interested in. This way you can attract organic traffic to your website and reduce spending on paid media.
Incorporate relevant keywords in your content and use SEO strategies to market it. Share your content across various channels like social media, blogs, and email newsletters. Try to engage with your audience through comments and shares.
Also, these ways of marketing are resource-intensive which means that you will have to incur marketing team costs and other indirect costs that may occur.
2.7. Shorten your Sales Cycle
Without a doubt, a lengthy sales cycle can drain your resources. On the other hand, a short, fast sales cycle means quicker conversions of leads into customers. With shorter sales cycles, your team will be able to focus their efforts more efficiently, increase productivity, and reduce overall resource expenditure.
Your team will be able to move to the next potential client quickly and reduce the associated opportunity costs. You can streamline and optimize your sales process using automation tools and eliminate manual errors.
Quickly meeting customer expectations in the sales process can contribute to higher customer satisfaction and retention. As satisfied customers are more likely to become repeat buyers, you can significantly reduce the need for additional acquisition spending.
2.8. Retain Customers
Your existing customers are likely to spend more on your product than the new ones. Stats show that on average, repeat customers spend 67% more in the third year of their partnership with the brand than they do in the initial years. Undoubtedly, it’s easier to convince your existing customers to buy more from you than someone who has never interacted with your company.
With an increase in your repeat customer rate, you can easily lower your customer acquisition costs. Make use of strategies like customer feedback, loyalty programs, and referral programs to engage your customers. Also, keep an eye on your churn rates.
Forbes found that it costs five times more to acquire new customers than it does to retain the current ones. Also, even a small increase in customer retention can lead to a 25%-95% profit increase. This surely seems like a mantra to lower your customer acquisition cost.
2.9. Improve your Sales Funnel
With an effective sales funnel, you can efficiently manage your customer’s buying process. It is about how a company guides its customers through their buying journeys from being leads to becoming paying customers. A great sales funnel in place can help companies get insights into what their potential customers have in mind.
It becomes easy to understand the reasons why a customer would have dropped a purchase.
Software like Kylas can help companies keep an eye on their customer journeys and identify the bottlenecks. This can help businesses address areas of improvement and increase sales.
2.10. Use AI
Reducing CAC is directly linked to reducing human costs associated with marketing and sales. When you automate routine tasks, you automatically free up time for your teams to explore other ideas for selling and growing your business.
From AI chatbots and automated email campaigns to smart recommendation tools, there is so much that you can use to deliver great experiences to your customers.
3. FAQs
3.1. What is Customer Acquisition?
It is exactly what it sounds. It is the strategy of acquiring new paying customers for a business. It’s not about just about the purchase or signing up for a contract. But includes the complete path from prospecting to becoming a paying customer.
This path can be short or long depending on the business and the customers it tries to acquire. Whatever it could be, the aim of the strategy is to improve conversion rates.
3.2. How to Analyze Your Customer Acquisition Cost?
To get a complete understanding of CAC, one must understand it across categories and channels.
1. Initial CAC
It is the cost incurred in acquiring customers for the first time.
2. Reactivation CAC
It is the cost of bringing back lost or previous customers.
3. Renewal CAC
It is the cost of retaining a customer divided into first-time renewals, second-time renewals, and so on.
4. Market CAC
It is the cost of acquiring customers within specific markets.
5. Customer CAC
It is the cost of acquiring customers based on specific demographics.
6. Product CAC
It is the cost of procuring a customer for a specific product or service.
7. End-users CAC
It is the cost of gaining customers by the number of users their license permits. The cost here is divided by the total end-users rather than the individual contacted customers.
4. Wrapping Up
In a nutshell, the cost of acquiring new customers should not be more than the value they bring to your business. If it is, it’s time that you take a look at your marketing and sales strategies and refine them. Calculate your CAC and see how you can lower your costs while still catering to your customer needs.
Remember that customers who have been with your business for some time are the ones who are more likely to add more value. Don’t overlook them and keep convincing them to keep buying from you.
