Your company spends so many resources and money in order to acquire new leads and customers every day. Have you ever thought of minimizing it? Well, if you haven’t, then you need to think about it right now as you eventually want higher ROI, and reducing customer acquisition costs is one way to achieve a higher return on investment. Let’s first understand what Customer acquisition cost (CAC) is and how to lower customer acquisition cost.
What is Customer Acquisition Cost (CAC)?
Customer acquisition cost is the total cost to acquire a new customer. You can determine your CAC with this formula.
This cost will include salaries of marketing as well as a sales team, expenditure on marketing strategies, social media, and advertisement costs.
What is a good customer acquisition cost?
Now that you know how to calculate CAC, the question which arises is; What is a good customer acquisition cost? Is the CAC rate you are calculating, good or bad? There is no standard metric to define a good or bad CAC. However, you can use the ratios below to give you an understanding of whether you are headed in the right direction.
Calculate the ratio of CAC: LTV or Lifetime Value.
- 1:1 – It means expenditure to acquire a customer is equal to the revenue made by it.
- <1:1 – It means CAC is higher than revenue.
- 1:3 – It means CAC is lower than revenue, which means you have higher ROI. Hence, It is considered a good Customer Acquisition Cost.
Factors affecting CAC
Customer acquisition cost is mainly a combination of 3 variables, which are:
- Cost per lead- marketing costs
- Touch costs- sales and marketing staff salary
- Conversion rates
When looking to answer the question, “How to lower customer acquisition cost” there are various factors you need to consider.
- Time: Time is a very important factor in order to determine the rhythm of the business, whether they should be targeting their customers annually or monthly.
- Customer type: The type of customer a company needs; i.e., whether they want their customer to spend low or they want their customer to spend high.
- Revenue acquired: Gross margin, analyzing revenue acquired to the gross margin is very important. Are you adding up on the efforts in acquiring a new customer but are eventually spending more money, then the company’s efficiency is low.
An average CAC depends on which sector you are working in. The education industry has the highest CAC while the average customer acquisition cost for ecommerce is the lowest. For the education industry, it may be 862 USD while SaaS companies have 205 USD. While the average customer acquisition cost for ecommerce is around 87 USD.
How to lower customer acquisition cost?
Although there are numerous ways to reduce CAC based on your industry and business, we listed down the key factors to help you acquire customers at a low cost.
Know your target audience
It is very important for an organization to use its resources in the right direction. For that, they need to know their target audience. If you define better, you win better. Define the target audience that would want your products and services and try to engage with them in different ways.
Customers want products or services which are unique, and beneficial to them, they need personalized content and interactions. Hence, it is very important to create buyer personas and provide your customers with the right information in the way they want.
Calculate the CAC rate correctly
If you want to earn a positive return on investment, then you should first determine your CAC. This may act as a target for your sales and marketing team and set a benchmark.
If you own a startup or your business has recently started, then you can look for the average customer acquisition cost in your industry or your competitors and work on setting up CAC.
Retarget your customers
Retargeting keeps you in front of your potential customers. It is not necessary that a customer who visits your website or downloads your app may be a loyal customer. Retargeting is a way for organizations to persuade visitors to reconsider your product or service. Since they have visited your website and are familiar with your product there is a higher chance of conversion.
Google ads display network or Facebook ads help with retargeting. You can also use a combination of two channels which may increase the chance of converting your customers.
Customer retention is Important
One of the best answers to your question “How to lower customer acquisition cost” is to improve customer retention. On average, the regular customer tends to spend 67% more in the third year of their business with the company than they did before. Hence, it is much easier to convince your existing customers than your new customers.
Customer retention can lower your CAC by increasing the rate of repeat customers and increasing purchase frequencies and average order values. You can use several strategies like feedback loops, customer education programs, and customer loyalty programs.
Define and show your USP
USP means Unique selling proposition. You need to tell customers what makes your product unique. Nowadays, the customer looks for uniqueness in a product/service. You need to differentiate your product from your competitors. Adding a USP may help in attracting potential customers and may act as an asset in order to motivate your users.
Try to keep the churn Rate low
Customer churning is a nightmare for CAC. Churn rate is basically the percentage of users who leave your product or service over a period of time. You can calculate churn rate using this formula.
Churn rate = 1- Retention Rate
It calculates the customers you lose and hence no. of customers you lose will definitely increase your customer acquisition cost as the cost which you spent on acquiring those customers will be a waste.
Automate your Marketing methods
Automation is very important in today’s digital world. It helps in speeding up the process that was done manually. Automating your marketing methods may be a huge cost saver and time saver as well.
According to the data, companies which use automation in their marketing methods, see an increase in revenue within six to nine months.
Optimize your sales funnel
A powerful sales funnel helps an organization productively deal with a client’s purchasing process. The funnel is the manner by which an organization guides clients from being leads to becoming paying clients. Sales funnels are fundamental while attempting to lower customer acquisition costs. An extraordinary sales funnel gives adequate data and gives the organization an understanding of the insights of its expected clients.
Customer acquisition cost is an important metric every company should track. It is the one metric that helps a business increase its return on investment. Reducing CAC, can not only save you money, but also time and effort which can be used for other aspects of your business. Try these 8 tips to reduce customer acquisition costs and get better results.