How To Lower Your Customer Acquisition Cost
Every media company, reseller, broadcast station and agency face challenges that makes it difficult for them to sell their services and products to businesses successfully. One of these primary issues has to do with the high costs of acquiring and keeping new customers. If this sounds familiar to you, here are a few steps you can use to lower these acquisition costs.
The Issue: High Customer Acquisition Costs
Costs involved in customer acquisition are usually high, while the traditional selling methods are not scaled for the digital dimes. Resources and time is wasted on leads that are cold and are not ready or will never buy from your business.
One of the difficulties for the salespeople to get businesses that are local to buy into the digital offerings increases the resources costs of the acquisition. In addition, digital is already difficult to sell, while an increase in sales efforts will necessitate more resources. Here is on a focus on your own company’s Customer Acquisition Cost and the steps you can use to lower it.
What Is CAC ” Customer Acquisition Cost?
CAC, which stands for Customer Acquisition Cost is explained as the overall costs involved when it comes to acquiring new clients. This is a type of metric which is used widely in businesses in order to track costs of converting prospects into clients. CAC is a total marketing and sales spend that is required in order to acquire the new client.
The metric is a reference to the money that your company is spending on marketing and sales over a specific time-frame to acquire the new client or user, whether it is through outbound sales-efforts, marketing campaigns or any other channels.
How Is Customer Acquisition Cost Calculated?
CAC is calculated in the way of dividing all costs that are spent to acquire customers (a specific number) by a number of users or customers that have been acquired. To do this you would need to divide your marketing expenses (total amount) that was dedicated to the purpose of acquiring these customers by a number relating to the customers that either signed up for your services or made a purchase.
An example of this is when John spent $100 on marketing efforts in the year 2018, and went onto acquire 100 new customers, then John’s CAC would be $1.00.
Here are 7 tips you can use to reduce your own Customer Acquisition Costs:
If you are running a business and you need revenue, you need to know about CAC. Customer acquisition cost is a key metric dedicated to any of the businesses that rely on obtaining customers that bring in revenue in order for the business to survive as well as thrive. This is associated with about 99% of companies. CAC is a reference to all marketing and sales costs that you use to obtain new customers.
One of the main reasons that CAC is so important has to do with the viability linked to your own business model that is dependent on it. By now you probably already know that costs involved in acquiring new customers is high, and the high CAC’s is often the primary reasons that many of the online businesses will fail.
It is also important when talking about CAC to mention one of the other important key metrics known as LTV (Lifetime Value of Customer). LTV involves the abilities to monetize a customer. Regardless of how efficient CAC might be in your company, if you are unable to generate revenue that is higher than what you have spent, you are actually losing money. Typically, you should have a goal to recover your CAC in a year.
The better business models will have an LTV to CAC ratio of 3+. What this means is that the acquired customer has generated a minimum of 3-times the CAC. However, this could vary.
An example of this is that SaaS start-up would require a figure that is higher to scale faster, while the local based e-commerce businesses could still be doing well with a figure over 1. So, what its actually about is to increase your LTV while bring down your CAC. Below are 7 effective ways to achieve these goals.
1. Improve Your Conversion Rates
As you are spending money in order to attract traffic, the sales volumes will be dependent on the amount of this traffic that you are able to convert into customers that pay. As your conversion rates increase, the lower your CAC becomes.
When it comes to improving conversions, you need to be focused on the structure, copy, CTA design and layout, testimonials, emails, trust marks, etc. One of the other effective ways to boost conversion rates involves investing in email marketing and retargeting. There are visitors that take time before they make a buying decision, which is why you want to ensure you are staying in touch.
2. Invest In Onboarding And Support
Attracting traffic is one of the easier tasks. Even the act of activation of this traffic is still easy in comparison to retaining customers. For example, when it comes to mobile apps, around 90% of the downloaded apps are either abandoned or deleted after only one use. When it comes to web products, these figures are worse.
In a SaaS study conducted in 2013, it showed that only around 2.2% of the acquired users transitioned into paying customers. The act of engaging an acquired user into an active customer is known as onboarding.
This involves a combination of educating, selling and using the service or product that you have to offer. Most of the potential customers will lapse due to the fact that do not understand the value of your product or they might even feel lost.
At the very basic levels, you want to aim at offering customer support that is great and maybe even live chats. Once a user has completed a sign-up or any other type of activation, it needs to be followed up in the way of offering either a time-limited incentive or a helping-hand.
Today there are various tools that can assist you in managing this portion of user-onboarding. Before you start to go through the UserOnboard website that is focused on onboarding better practices, make sure you have time dedicated to these processes.
3. Virality And Referrals
If you have found a way to get your customers to refer friends, you might have already found an effective way to lower your CAC by 50%. It comes as no surprise that “referral” marketing is the fuel for some of the fastest-growing companies.
An example of this includes Uber, which is now a $40 billion taxi-marketplace that has not spent a lot of money when it comes to marketing. Travis Kalanick, its founder stated that 95% of all their riders heard about Uber through other Uber riders.
This start-up fueled this word-of-mouth growth in the way of using clever publicity stunts along with referral campaigns. Another recent study concluded that the referred customer offers a 16% higher LTV.
Some of the tools to get started include Justuno or ReferralCandy. It is important to know that word-of-mouth is different to viral marketing. While marketing that involves word-of-mouth is reliant on the customers, virality happens to be engineered within the products themselves.
What this means is that customers will promote a product in the way of using it. An example of this is Instagram’s cross-posting features or the “sent from my iPhone” signature, when iPhone was still a new and unproven product, which assisted in growing the perception of the brand as their customers promoted this product through every Facebook post and message.
Another example includes GrooveHQs test on the form footer just by adding “powered by Groove” which is the test that increased their referrals by 30%. This is an additional 30% by just adding a link to the bottom of the form.
4. Marketing Automation
There is marketing-automation software which can assist you in growing your company in a number of ways. Some of these include improving lead generation, reporting and measuring, email targeting and more. Automation is a powerful tool due to the fact that it decreases the human work that is required.
To compare these costs, for an average business the salaries account for around 70 to 80% of all the expenses. If converting a single customer requires 5-minutes involved in human work, the costs associated with these 5 minutes might buy you around 3-days’ worth of a marketing-software subscription.
AdWords for example, features a powerful tool known as automated bidding. When used in the right way it can translate into a massive cost and time saver for your business. An example of this is a fashion store known as ModCloth uses automated bidding that has reduced their CAC by 14%.
5. Mix Things Up Using Free Channels
Paid advertising will cost money, but everyone knows that it works. However, there are also a lot of long-term and short opportunities to obtain free customers. One of the channels is known as PR. In some cases, it could include a once off opportunity like announcing a launch or to get an investment. Or it could be for something that is long-term like obtaining a guest column that is regular at a popular online-publication.
Another worthwhile but separate mention would be publicity stunts. Various successful companies use these tactics. Virgin Airlines and Richard Branson is one of the classical examples.
The partnerships are another effective method to obtain users without having to spend money. There are many businesses that use this effective tactic in order to promote faster growth. One of the more high-profile examples, includes the Uber-Spotify partnership.
Another example includes a woman who operates her own dance school that entered into a deal with a nearby jewelry shop. Every time a person purchases a wedding band or ring, they receive a bonus in the form of a free dancing lesson in order to prepare for the wedding. This is an example of a clever partnership.
6. The Pareto Principle
Pareto was the Italian economist that first identified the “Pareto-rule.” The premise for this rule involves that 20% of the actions you take will lead to 80% of your overall results. In the same way that 20% of the trees he owned yielded 80% of the overall fruits, a number of mangers have found a ratio that is similar when it comes to running a business.
While a more realistic ratio might be 70/30 or 90/10, you will probably find that it applies to most of the aspects about your business. An example of this could be that 20% of your ads will translate into delivering 80% sales. Or maybe 20% of the user acquisition channels have resulted in 80% of your overall business. The same applies to leads, your keywords and even your daily task management.
You will want to focus on what is bringing in the results you need to either automate or outsource or do away with the rest. An example of this is a business discovered that their salespeople in the company were wasting more than 80% of their time associated with lead research.
The owner of the company decided to outsource this type of work to experienced and professional freelances which allowed the salespeople to focus on selling which is what they do best. The revenue for this company doubled within a month.
7. Innovate Constantly
Regardless of what you do, it is vital to keep improving and innovating. There will always be new opportunities and options that come up. In a similar way newer types of Customer Acquisition channels will become available, or the ones that you are already using might not work anymore or need improvements.
Keep your focus on what is already working, but at the same time be open to the latest ideas and more importantly make sure you are testing them out. If possible, you will want to set aside a small part of the budget for these experimentations.