It is never easy for companies to get new leads and customers consistently. Each and every day, they have to use their resources in a strategic way to gain the most out of it. Now after spending a certain amount of resources, be it human effort or finance, companies rely on customer acquisition cost (CAC) to determine if the campaign was successful or not.
The lower the customer acquisition cost is, the better it is for the company in the long run. If the CAC is higher than the lifetime value a customer can provide, then that will only lead to the downfall of the business. Simply put, companies can easily increase their revenue by reducing the CAC. In this article, we are going to discuss customer acquisition cost, its importance, and how you can calculate it. In the end, we’ll also give you some ways that can help you reduce customer acquisition cost significantly.
What Is Customer Acquisition Cost?
The approximate cost that a company has to pay to get a new customer is called customer acquisition cost. If we have to put it another way, then customer acquisition cost is all the marketing and sales expense involved in converting a lead into a customer who provides value to your company.
The CAC is dependent on various factors like investment in marketing and sales, cost of the tools used, advertising cost, the salary of marketers and salespeople, and so on. The aim of the company should be to reduce the combined sum of all these expenditures. Now let’s see why it is so important to have a low acquisition cost.
Importance of Customer Acquisition Cost
Are you not sure if your campaign is performing optimally or not? Or are you investing too much in the sources that are not very likely to convert? To give the most accurate answer, you should be well aware of the customer acquisition cost of your business. It tells you if you’re getting an ample output with respect to what you are investing in or not. By further analysing the CAC, you can identify the channels that are not reaping as much as you want them to. The graph below is from Databox, which shows the channels that offer the lowest customer acquisition cost.
With the help of CAC, you can determine the value of a customer for your brand. And if you are in the SaaS industry, it will help you analyse the scalability of your business. The difference between what you are getting and what you are investing to get it can help you track if your business is moving on the right track. So now we know what CAC is and why it is so important, the upcoming section will help you calculate the customer acquisition cost.
How To Calculate Customer Acquisition Cost?
Calculating CAC is not rocket science. However, the value that you get is always approximate. It is mostly so because it is not sustainable to calculate the acquisition cost for every individual customer. More importantly, the results do not have to be insanely accurate to be used for identifying the channels that are not giving the desired output. The formula to calculate the CAC is:
In other words, divide the total investment you have put into getting new customers with the total number of customers that you’ve got with that investment. Let’s say you have spent $500 in a year on marketing and sales. This investment brought 50 customers for you. Then the acquisition cost per customer, i.e. CAC will be $10. If the value your customers are providing is more than $10, say, $15 or 20, then you’re running a successful business and should invest more in acquiring new customers.
Ways To Reduce Customer Acquisition Cost
Companies spend a good amount of time and resources in conducting research and marketing the product. All of the time and resources spent over a period of time adds up to influence the customer acquisition cost. We have had enough of the theory in this article. Let’s now discuss some practical ways that can help you reduce the CAC significantly.
Prioritize Appropriate Audience
Spending your resources and marketing strategies on the wrong audience does not make a lot of sense. It is essential that you outline your target audience and spend only on those who are actually interested in your products and services. Once your funnel is filtered, your engagement with those customers will be seamless. For example, the customer who’s already connected with your business will not benefit from the content that is made specifically for the new visitors.
By identifying and prioritizing your audience, you can avoid spending resources on the channels where you don’t need to.
Work On Your SEO Game
SEO has the potential to reduce the customer acquisition cost by a significant amount. It is mainly because SEO allows you to get hold of the customers even before they are aware of your brand. It does so by targeting the most popular and asked keywords that are too expensive for PPC and have a higher conversion rate.
Moreover, you can form strategies to use keywords in some specific way to get the most out of your SEO campaigns. There are a plethora of tools out there in the market that can help you with keyword research, but none comes closer to the keyword generator by SE Ranking in terms of functionality and popularity. This tool can help you increase your visibility through finding both short and long-tail keywords. SE Ranking generates results in real-time, which makes it even more reliable. Not only this, but you also get to analyse some of the core metrics for keywords like its difficulty score, search volume, and CPC. SE Ranking has many other features such as website audit, on-page and backlink checker, page change monitor. This one tool is enough to take care of almost all of your SEO needs.
Improve Customer Retention
The customer who is invested in your business for a longer span of time will always spend more on your products and services than the customers you have just acquired. Customers who have been associated with you for more than three years tend to spend 67% more than what they used to in their initial years. It is also relatively easier to convince older customers about the values provided by the products than to convince new acquisitions.
You can lower the customer acquisition rate by increasing the number of repeat customers and the frequency at which they make the purchase. If you can find a way to increase the average order value, the revenue will increase, which will further decrease the CAC.
Optimize Customer Experience
There are no right or wrong ways to start a search campaign. However, there are many best practices that you can follow to improve customer experience, increase conversion rate, and hence, reduce the cost per acquisition.
It is quite simple to imply that the more conversions you get out of a campaign, the more economical will be your customer acquisition. And One of the best ways to increase the conversion rate is by giving your visitors a satisfactory experience. If their experience is good enough, it’ll form a reliable image of your brand, and hence, they’ll be willing to move forward with you.
On A Concluding Note
Customer acquisition cost is a crucial metric to ensure that your business is moving on the right track. Moreover, you will always be benefited if your cost per acquisition is lower than the value provided by each customer. It is essential that you acquire customers in the most efficient and effective ways possible. In this article, we mentioned a few ways that can help you in reducing the CAC. You don’t necessarily have to spend tons of resources to get customers. Invest only on the channels that guarantee exceptional results.