Editor’s Note: This article first appeared on the Get Control blog here.
Customer acquisition is the cornerstone of any viable business. But are you spending too much time and money trying to lure new customers?
It’s important that operators understand how much their business is spending on acquiring customers. Calculating customer acquisition costs (CAC) will not only give you a terrific insight into your marketing team’s performance but also show investors whether your business has the ability to scale or not.
How to Calculate Customer Acquisition Costs
Customer acquisition costs are calculated using the following formula:
Total Cost of Marketing / Total Number of Customers
Let’s say you own Get Shirty, a subscription commerce business that sells men’s shirts. You spent $500 on customer acquisition (marketing) throughout the month of July. You acquired 50 new customers in that month. Therefore your customer acquisition cost is $10.
Business owners need to balance both the cost of acquiring a customer with their ability to monetize the customer – also known as customer lifetime value. If a business is spending $1,000 to acquire a customer and the customer’s lifetime value with the business is only $500, you won’t stay trading for very long.
Customer acquisition cost has even been called the “startup killer” because “the cost of acquiring customers often turns out to be higher than expected and exceeds the ability to monetize those customers”. It’s important to understand the balance between CAC and CLV.
How Can I Improve Customer Acquisition Costs?
Startups and young businesses have got to be smart when it comes to CAC. Spend too much and your business won’t trade for more than a matter of minutes; spend too little and your business won’t acquire the customer base it needs to generate revenue. Get the balance right with these tips.
1. Improve Your Website Conversions
You might be able to generate a ton of traffic to your ecommerce or SaaS website, but how much of it actually converts? Monitoring, testing, and improving your conversion rates is a sure-fire way to decrease customer acquisition costs. Why? The more customers you’re able to push further down the funnel from your marketing spend and convert into customers, the lower your CAC will be.
A great way to measure your conversion rates is through implementing A/B testing on your website. For example your sub-com shirt business has the call to action (CTA) of “sign up for shirts”. You track in Q1 how many customers convert through this link. In Q2, you change the CTA to “get monthly tailor shirts delivered today”. You immediately see an increase in conversions. In Q3 you change the wording slightly to “get monthly bespoke shirts delivered today”, and your conversion rates go through the roof.
Get Shirty has been lucky. Your A/B testing has ensured that your conversion rates have increased. Other businesses may need to trial and test a whole bunch of methods – not just CTA buttons but on-page copy, layout, emails etc – in order to increase your conversion rate and lower your CAC.
2. Be Aware of Your Revenue Spending
It’s a given that a business will need to market their product in order to attract and acquire customers. The amount of revenue that’s specifically spent on marketing and therefore directly impacts your CAC cost depends on the type of business operation. Salesforce – a well-known SaaS business – invested over 53% of its 2014 revenue in marketing. The result? The business grew by 33% compared to the previous year. For other businesses, the average amount of revenue spent on marketing was 10%.
Spending more than 10%? Readdress your marketing strategy and analyze what channels aren’t working for your business.
3. Implement Buyer Profiles
Operators shouldn’t be shooting into the dark when it comes to marketing their product. Business operators need to be explicitly clear about who specifically they’re targeting their product toward. For Get Shirty, their target buyer could be: “Gavin, 34, senior management role, lives alone, doesn’t have time for shopping, needs to look smart for executive meetings”.
By developing buyer personas, operators will have a clear idea of who they’re aiming their acquisition efforts at and be able to market their product to that specific group. This in turn will improve acquisition efforts and improve CAC.
4. Reduce Churn
If a business is serious about improving CAC, you need to think long and hard about reducing churn. How can your business improve its acquisition costs if a high percentage of customers are actively churning each month?
5. Focus on 80/20
Originally a wealth distribution estimation in Italy, the 80/20 rule – also known as the Pareto principle – theorizes that 20% of your efforts produce 80% of your results. This can be applicable to businesses in many ways, for example 20% of your customers amount to 80% of your revenue.
Think about your input and output levels for customer acquisition. Where is the 20% of your customers who drive the most revenue coming from? It could be organic search or native advertising, for example. Find this statistic and concentrate solely on acquiring a similar type of customer.
Invest in Customer Retention
While focusing on acquiring new customers, it’s also important to retain your current customers. Keep your customers happy and excited. This will also help spread word of mouth marketing.
Business is all about balance and the overall aim for any operation that wants to last in the market is to decrease customer acquisition costs while actively increasing customer lifetime value. This magic formula will drive business success, ensure longevity, and appeal to investors.