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!
Yes, you will have to factor in the cost of making those changes when you tally the month’s CAC, but do you agree that the long-term value is likely to be way worth it?
If you do one thing to lower your customer acquisition costs and improve ROI, make it conversion rate optimization. It’s most always the best place to begin.If you do one thing to lower your customer acquisition costs, make it conversion optimization. Click To Tweet
Get more organic traffic to your website
We’ll stay out of the mud here by talking only about organic traffic. Paid traffic comes with its own special costs, so I’ll save that for the (future) more in-depth discussion about metric calculations and the finer points of the concepts I’ve introduced here.
Organic traffic isn’t free, but it can be much less expensive than paid traffic. Let’s look at our prior example. If you can boost daily traffic from 40K to 50K while getting that 2% boost in CR, the numbers will look like this: 50K x 5% x $10 = $25,000. Increasing your conversion rate is lighting a fire under your revenues, and adding traffic is like adding fuel to that fire.Increasing your conversion rate lights a fire under revenues; traffic adds fuel to the fire. Click To Tweet
Those two tweaks more than doubled your daily revenue! Once again, you must consider the cost of making those changes when you compute monthly CAC, but the long-term result is likely to be impressive.
That’s why I love what we do at The Good. I get to see clients realize spectacular results from what seems like minor adjustments. No, I can’t guarantee working with us would double your revenue… but I’ve definitely seen it happen.
Write better copy
Stronger, more persuasive copy can be the catalyst for improved conversion rates, higher average sales, more frequent sales, better reviews, more referrals… the list goes on and on.Stronger, more persuasive copy can be the catalyst for improved conversion rates. Click To Tweet
This is an area where you may need to go forego your own opinions and the opinions of management. Don’t let the management or marketing team edit the power out a copywriter’s work. Yes, even a broken clock is correct twice per day, but there’s a simple way to find out what works best: TEST.
Set up an A/B split test to compare your copywriter’s suggestions to management’s edits. Test to see which works best. Make another change. Test again. Rinse and repeat.
If management consistently beats your writers, bravo! Maybe you need to invest in better writing. If writers beat management, heed the lesson. Every manager is not the “wordsmith” she fancies herself. Sorry to break the news, but it’s true. We see it all time. Management interference may be a leading cause of insufficient sales.
Copywriting is an area where it’s possible to sharpen your CAC metric without incurring any additional expense. You’re already paying for the work. Just do what it takes to make it more effective!
Customer Acquisition Cost and the ROI Formula Revisited
We’ve looked at the best three no-nonsense ways CAC first-aid can do wonders for ROI. There are other tactics you can employ, but these are the ones I like to look at first.
Additional ideas are doing a better job of identifying your audience (which will help your copywriters construct more effective messaging), cutting down on excessive overhead expenses, getting customer service involved in the process, and decreasing the load time of your website.
If you want to find out what you need to do to improve your CAC, at a high level, then get your Stuck Score™ today.
Once you get enthused about tracking customer acquisition costs, you’ll see potential ways to hone your metrics further peeking out at you from every corner of the business.
About the Author
Jon MacDonald is founder and President of The Good, a conversion rate optimization firm that has achieved results for some of the largest online brands including Adobe, Nike, Xerox, Verizon, Intel and more. Jon regularly contributes content on conversion optimization to publications like Entrepreneur and Inc. He knows how to get visitors to take action.