In the way that driving with your eyes closed is dangerous, so is acquiring customers without knowing what it costs you to acquire them. Both have disastrous outcomes.
Whilst acquiring new customers is always something to be happy about, it doesn’t mean you should throw out common sense in how you account for your time and human resource you spent in acquiring them. These combined are referred to as your CAC (customer acquisition cost).
Startups understand that if they pay Google for advertising, that should be included in their CAC, but many other items add up as part of the CAC that is less obvious.
You might feel you have ‘acquired’ your new customer for ‘free.’ When you account for the additional effort outside of direct money out of your pocket, you might find that your new user is costing you more to acquire than you are charging them.
Thus, you unwittingly created an imbalance in your company’s cash-flow.
When your cost to acquire customers (CAC) exceeds the lifetime value of customers (LTV), then your startup is getting ready for the last post.
In this article, we will explain the CAC in more detail, how you can measure it, and what steps you can take to improve it.
How you can measure your CAC
You get your CAC when you divide all marketing expenses by the number of customers acquired in the period the money was spent. For example, if a company spent N10,000 on marketing in a year and acquired 100 customers in the same year, their CAC is N100.
What about CAC per marketing channel?
Knowing the CAC for each of your marketing channels is what most marketers crave. If you know which channels have the lowest CAC, you know where to double down on your marketing spend. The more you can allocate your marketing budget into lower CAC channels, the more customers you can obtain for a fixed budget amount.
The simple approach is to break out your spreadsheet and gather all your marketing receipts for the year, quarter or month. Then add up those amounts by channel.
Segmenting Your Payments
For example, how much did you spend on Google Adwords and Facebook advertising?
In this case, you might put this in a column called “PPC” or “Pay-Per-Click”. How much did you spend on SEO and blogging? This might go into a column called “Inbound Marketing Costs”.
Now that you know how much you spent on each channel, you can apply a simplistic formula and assume each channel “worked” to get the same amount of customers as the next channel. This would be an averaging method.
The only issue is that it can be difficult to know what channel is responsible for which customers.
For an e-commerce company that sells physical products, it’s easy to know what Pay-Per-Click advertisements lead to direct sales because of the conversion tracking the advertising platform provides.
In this case, you can determine that value and note this in your spreadsheet. This will give you a better idea of how your Pay-Per-Click campaigns are doing relative to the rest of your marketing spend.
Also, with analytic tools like KISSmetrics you can trace paying customers back to their “last touch” attribution source. This means you can see the last channel the customer visited before doing their first sales with your online business.
Now this is where marketing gets philosophical.
One school of thought is that each marketing channel supports the next channel – it’s a combined effort. Your blog posts reinforce your Pay-Per-Click ads, and all channels work together to bring in customers.
This is a common notion in outdoor advertising. Billboards reinforce T.V. campaigns, which reinforce radio spots and so on. Ultimately it comes down to your own company’s philosophy on how to attribute customer acquisition. If you feel that last touch is “good enough” you can use that model for your CAC calculations.
However, you may have wildly popular viral videos or a blog that drives a lot of word-of-mouth referrals. These obviously support your overall marketing efforts and tend to be more difficult to track and attribute to customer acquisition.
How you can improve CAC relative to LTV
The reality is that your advertising campaigns can always be more effective. Your LTV and can always come out more robust than your CAC. There are several methods your business can use to improve its CAC in its industry.
One way is to improve on-site conversion metrics. Set up goals on Google Analytics and perform A/B split testing with new checkout systems in order to reduce shopping cart abandonment rate and improve the landing page.
Also, enhance user value. By the highly conceptual notion of “user value,” we mean the ability to generate more value from a single customer.
This may be upselling additional features or implementing something to improve the existing product for greater positioning.
Finally, tighten up your customer relationship management. Nearly all successful companies that have repeat buyers implement some form of CRM. This may be a complex sales team using a cloud-based sales tracking system, automated email lists, blogs, loyalty programs, and/or other techniques that capture customer loyalty.
The general idea is, if you can’t retain customers, acquiring more won’t keep your startup from dying.
Featured image via strategisadv
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