Did you know that acquiring a new customer can cost up to 7 times more than selling to an existing customer? More so, the probability of selling to a customer you already have is 60-70% whereas the probability of selling to a potential lead is 5-20%.
We all know customer acquisition can be costly and that’s why it is really important to make sure you get the most from every £ of your hard-earned cash invested in finding and keep customers. The important thing in our view is that you measure how much getting a new customer is costing your business. In this article, we break down what the Customer Acquisition Cost (CAC) metric is, how it can be simply calculated and the ways in which you can go about decreasing it…not least during times of economic downturn.
What is Customer Acquisition Cost?
Put simply, Customer Acquisition Cost (CAC) is the amount of money required for a business to get a new customer and includes your marketing expenses and overhead. It is an important sales metric for businesses of all sizes. In addition to helping you work out how much money you need in the marketing budget itself, it allows a business to identify any potential inefficiencies that may arise within their sales process and help you make it more slick for customers. More so, the more your CAC can be reduced, the larger your profits are likely to be.
According to marketers Neil Patel and SheerID, your CAC includes the following:
● Marketing and advertising costs
● Cost of your internal marketing/sales team
● Creative costs
● Publishing costs
● Production costs
● Inventory upkeep cost
● Travel costs for meeting with new customers
● Equipment used by your sales/marketing team
● Any third parties involved in sales/marketing
To measure the full effect of CAC, businesses also need to look at another key metric, namely Customer Lifetime Value (CLV). This represents the total revenue a business can expect to gain from a single customer across the whole period of their relationship (basically think how much a customer spend on an average order with you, how often they do it and how long they stay with you). It is an essential metric to consider as it costs less to keep current customers than to acquire new ones, therefore finding ways to increase the value of your customer base is an excellent way to spur your business growth.
By looking at CLV and CAC collectively, you will get a useful view of how much £ value you are getting from your customer relationships. And bear in mind that customer acquisition and retention should go side by side; your efforts to lower your CAC should be, for example, combined with targeting re-engagement campaigns at your existing customers.
How you can calculate CAC
CAC can be measured by adding up the amount spent on customer acquisition (marketing and sales expenses) and dividing by the number of new customers gained during a specific timeframe.
For example, if you spent around £400 on marketing and related costs in the last month and gained 10 customers, your CAC for that month would be £40.
Although, on the surface, the above formula looks relatively simple, Ilia Markov from ChartMogul points out that it is actually a little more complex once we dig a bit deeper. This is because there is no ‘one size fits all’ way of calculating CAC - every business will have their own different way. Consideration of how best to approach calculating CAC usually revolves around the following questions:
● Should money spent on marketing tools be included?
● Should I include salaries of my marketing/sales team members in the calculation?
● What if I have an employee who divides their time between writing content and supporting customers? How should they be accounted for in the calculation?
● What about office lease and similar expenses?
Ilia Markov says that, as a rule of thumb, if any part of your team is involved in an activity that concerns acquiring customers, all their expenses should be added in the calculation.
Once you have found a method for calculating CAC, stick with it - keeping the formula the same allows you to compare the metric over time. That way you can understand the impact of any changes you have made.
5 strategies for lowering your CAC given the current cost of living crisis and economic downturn (SheerID):
1. Segment Customers
Targeting a wide pool of customers that aren’t necessarily an ideal fit for your business is a red herring that will see you spending more money convincing them of the value your business can offer them. This is where audience segmentation comes into play. That is, by grouping your target market according to shared traits such as age, occupation, location, behaviour and interest, you can create more target campaigns that speak to the needs of your ideal customer (lots of advice on GrowthBox about this).
2. Build Exclusive Offers
Offering exclusive discounts that appeal to the identities and core attributes of your consumers' lives, a technique known as identity marketing. Targeting specific consumer communities with discounts (a segment of your target market who share a meaningful characteristic such as similar life stage or occupation), allows you to show you value their custom.
3. Optimise Your Website (otherwise known as ‘help your business get found online!)
An easy-to-use website with a clear structure and responsive design is one of the most valuable investments you can make for your business. Make sure it is working hard for you and your visitors.
When checking that all technical aspects of your website are optimised, it is important to ensure that you minimise friction in the purchase journey. Friction occurs when something distracts a customer and prevents them from completing a process. The danger of this is that it can lead to customer frustration and tarnish their perception of your brand. By running regular testing to ensure everything is working as you wish, you can remove any potential friction and make it as easy as possible for your customers to buy. Taking the time to check your website is running smoothly is also a fantastic way to boost your conversion rate optimisation as it will allow you to spot any technical issues that may frustrate your customers and result in them clicking off your website before making a purchase.
4. Research Recession Business Habits
In an economic downturn, consumers will naturally become cautious when it comes to making purchase decisions as well as how much they are prepared to pay for it. They will instead focus their expenses on everyday items such as food or transportation and will limit their spending on non-essentials such as entertainment.
As a result, they will begin to search for ways to obtain the items they need for less by looking for cheaper alternatives or finding bargains. What this means for businesses is that a recession is an excellent opportunity for discount strategies, such as sweepstake promotion coupons, as consumers will be eager to save their money.
And bear in mind that, whilst it is tempting to slash your marketing budget during times like these, there is a mountain of evidence showing that businesses who continue to talk with their customers in tough times fare better than those who don’t (see our article here: Customers mean business).
5. Zero-party Data to Retarget Customers
Once you have verified your customers for an offer, you can begin collecting zero-party data; that is, data that a customer willingly provides in return for a clear value exchange. As zero-party data is voluntarily given, rather than passively collected, it is privacy-friendly, high quality and self-ratified, making it the ideal way to learn about your customers.
A business can use zero-party data to continuously retarget their customers with personalised messages. This has the added result of keeping your brand front of mind for your target audience and will, ultimately, help improve retention and customer lifetime value (CLV). And remember, keeping current customers engaged with your brand means you have to spend less in the long run acquiring new ones.
The GrowthBox view? During times of economic downturn, keep talking with your customers but do look for ways to lower your CAC cost and increase your marketing effectiveness. It will help boost retention, bring new customers through the door, whilst maximising revenue and making your marketing money work harder for you.
As always, if you need any extra help with your marketing efforts, let us know. We’d love to help. Our offer is free. We help small businesses work out what to do and help them connect with marketing experts who can get it done for them. For more advice and updates, check out our advice pages here: https://www.growthbox.co.uk/advice/.
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