What is your customer acquisition cost? It’s a powerful metric that can tell you a lot about the health of your business.
Every business school student learns there are only four ways to increase sales revenue:
- Get more customers
- Increase prices
- Increase the amount of the average transaction
- Increase the conversion rate of visitor to customer
Marketers condensed the formula by combining the last two tactics, and a prominent copywriter popularized the recipe as “The only three ways to grow any business,” but it’s not a new concept.
Get more customers, charge higher prices, and sell more to each customer… those are the basics of revenue growth, and that’s been the case since commercial transactions began.
It’s not the complete picture, though.
There’s another way to boost the bottom line. It’s a straightforward and sensible means of getting more ROI, but it sounds too much like accounting to get the notice it deserves. The method considers this question: Do you know what it costs to gain a new customer or client?
If you don’t know the answer, then reading this article and acting on the suggestions herein could leave you smiling all the way to the bank.
Let’s look at a relatively untapped factor that can help grow your business.
Customer Acquisition Cost and the ROI Formula
Return on Investment (ROI) is arguably the most important metric in business. It’s entirely possible for a company to get plenty of sales, but still lose money.
If it costs you a dollar to earn a dime, then your business is in trouble. Successful entrepreneurs never lose sight of the stock market adage “buy low, sell high”.
Consider your customer acquisition costs
Companies often focus on increasing sales, but devote little or only sporadic attention to cutting expenses. Everyone loves to feast, but few enjoy to diet. That’s a mistake.
This is where those fact-loving bookkeepers and accountants come in handy. The numbers they crunch can help keep you on track. Listen to them.
Calculating your customer acquisition cost (CAC) can be an eye-opening exercise, and it’s not a difficult task. The basic formula is to divide your total sales and marketing expenses for one month by the number of new customers acquired that month. That number is the amount it costs you to acquire one new customer.
This can be broken down even further by channel to understand what marketing initiatives are driving new sales and customers, and providing the lowest CAC and highest ROI.
Charting a course for customer acquisition cost and ROI
To leverage the CAC concept even further, calculate your average customer lifetime value (CLV). To do that, multiply the average yearly (or monthly) order total per customer times the number of years (or months) the average customer continues to order from you.
In a future article, we’ll go deeper into how to get more exact with these calculations. For now, let’s assume you can at least approximate your CAC and your CLV.
If your eyes are glazing over just thinking about those terms, don’t worry. We’re not going to take the math any further than we’ve already gone. If you don’t want to work with the numbers, just keep reading.
Our aim here is to talk about ways to lower the cost of acquiring a new customer. That will have a positive effect on ROI, no matter how closely you can calculate the metrics. It is good to have a reference point to monitor, though. To get started, all you need is a best-effort approximation.
Here’s what we’ve determined thus far:
- The higher your ROI, the healthier your marketing efforts, and thus business
- Customer value should be considered in light of average total per-customer purchases over the buying lifespan of the customer (CLV)
- Lowering the customer acquisition cost is good for ROI
The 3 Best Ways to Reduce Customer Acquisition Cost
Your business is not like every other business, so there will be tactics you can use to lower CAC that wouldn’t work for other businesses. This isn’t an exhaustive list; it’s a starter list.
Let’s look at some of the most effective tactics businesses can employ to drive customer acquisition costs down and ROI up.
Increase your conversion rate optimization (CRO)
This is the granddaddy of all CAC reduction strategies. An e-commerce website can make changes tonight that will cause tomorrow’s revenues to grow like crazy.
Consider this: For the sake of simplicity, let’s say your average daily sales are $12,000, your average sale is $10 (1,200 sales per day), and your average conversion rate is 3%. After reading this article, you engage The Good for our Conversion Growth Program™ to make some optimizations to your site. Consequently, your conversion rate (CR) bumps up to 5% (not impossible).
Assuming traffic to your site remains constant (40,000 visits per day), that 2% CR increase gave you about 800 more customers and $8,000 extra dollars in sales per day. That’s an example of why paying attention to numbers is critical. In this case, tweaking conversion rate by 2% resulted in a 67% increase in sales!