Customer acquisition cost – this is one of the most commonly overlooked but an important metric that defines how successful your marketing strategies are.
Today, customer acquisition is number one priority for businesses. And they carry out all kinds of activities (from running paid ads to engaging them on social media) to acquire new leads and convert them into customers. But one thing they are missing out here is the customer acquisition cost. How much are they spending to onboard a new customer and is it worth the spend?
A high customer acquisition cost but a low customer lifetime value means you’re just shelling out money which is not good for your business. So, in this article, we’ll be looking at ways to help you reduce customer acquisition costs while taking you through the basics as well.
What Is Customer Acquisition Cost?
Customer acquisition cost, well known by its acronym CAC, is nothing but the overall spend you go through in order to convert a prospect into your customer. The spend includes your marketing campaigns and payrolls for respective people during the entire timeline of the campaign.
This will bring you the question, how much is an ideal figure when it comes to CAC?
Okay, the answer is, that there’s no ideal figure here. The general rule is that the total amount you spend per acquisition should be covered by the customer’s LTV (lifetime value). And only then do the profits start coming in.
However, here are a couple of customer acquisition figures for you industry wise,
Now, this is just a general representation based on industry statistics. As long as you meet the above-mentioned general rule (and there’s at least one or two-fold profit), you don’t have to worry much. But again, it’s always good to acquire customers by spending less, isn’t it?
With the basics done, let’s move to the next section of the article.
How to Reduce Your Customer Acquisition Costs?
In this section of the article, we’ve discussed the seven most important ways that will help reduce your customer acquisition costs.
Let’s get started with the first one.
1. Calculating Customer Acquisition Cost
To reduce customer acquisition costs, you need to know how much you are spending in the first place. Only when you know how much money you are spending to acquire a customer, you’ll know how to tweak your strategies and reach the set benchmark.
Here’s the formula to calculate customer acquisition cost,
In order to calculate customer acquisition cost, you just need to calculate your total expenditure and then divide it by the total number of customers you have acquired in the campaign.
Say, for example, you have spent $1500 and have acquired 100 customers, on calculating with the above formula, the cost of acquisition per customer is $150.
Based on the arrived figures and your profits, you’ll get a basic idea as to how much your customer acquisition cost should be.
2. Identifying Your Target Audience
At times, marketers end up running campaigns for an audience group who are totally not interested in what you offer. And at the end of the campaign, you end up with literally no conversions.
Repeated similar sorts of campaigns will only result in an increased spend with few conversions.
So, make sure that all your marketing efforts are targeted to the right set of audiences. Only if your marketing campaigns are relevant, they’ll resonate with the audience. And you’ll start seeing engagement.
Identifying who your targeted audience is and engaging them is the first step to reducing customer acquisition costs.
The audiences are already interested in the products/services you’re offering. All you have to do is, be there when they need it the most – saves both effort and money.
3. Always A/B Test Your Marketing Campaigns & Landing Pages
You need to give your prospects the best version of your marketing collaterals. Whether it be ad copies/creatives or your landing pages, you need to make sure you are clear and sound convincing to your audience.
Like we already said, you need to resonate with your audience. Make sure you tell your target audience what they’ll be getting out of your products/services. And finally, A/B test your campaigns and landing pages to see which version is performing the best. Make a few tweaks again and only then run your campaigns live.
Showing a mediocre version will only increase the length of the acquisition timeline and increase the figures as well.
4. Customer Referral Program
This is one effective way to reduce customer acquisition costs and at the same time improve your user base.
Referrals are powerful! Irrespective of the nature of the industry, a referral program ends up working 8 out of 10 times. But to make it work, you need to offer something rewarding for existing customers. And it’s better if you could offer something for both the referrer and the referral.
Remember how Dropbox grew its user base by 3900% with a simple referral program? Similarly, you can also come up with a referral program that benefits both the referrer and the referral. It could be gift vouchers, free product usage, premium access, or anything that you think could be of value to your target audience.
Coming up with a successful referral program will not only help you increase your customer base quickly but can also help you reduce your customer acquisition costs (depending on the incentive you’re offering).
5. Retarget Your Audience
Remember where we told you to identify your target audience and engage them with relevant marketing campaigns?
So, here’s the thing – not every prospect becomes your customer in the first attempt, And this is why you need to retarget them. Chances are they’ll become your customer the second time you engage.
Retargeting your audience can reduce customer acquisition costs because they already know who you are and it’s just the extra push they’ve been waiting for. Your retargeting campaign should do the job well. Plus it’s way cheaper than engaging with a completely new set of audiences.
6. Optimize Your Sales Funnel
As a business, it’s important to have a properly, optimized sales funnel in place. It’s good if you are able to run ads and acquire customers (which is just the bottom part of the funnel).
But if you want to build authority and project yourself as a thought leader in the industry, you need to concentrate on the top part of your sales funnel as well. This will also help you reduce customer acquisition costs and the sales process will take care of itself in the long run.
Here’s a quick idea of what you should offer during the different parts of the funnels,
Awareness Stage – You can engage your customers with blog posts, email newsletters, tips & hacks, checklists, infographics and more.
Evaluation Stage – Customer testimonials, eBooks & case studies, demo videos, targeted ads, webinars and more.
Conversion/Purchase Stage – Landing & pricing pages, free trial, free demo and more.
If the above process is streamlined and one leads to the other, then your sales cycle will be pretty much automated.
7. Customer Retention Is Key to Reduce Customer Acquisition Costs
And here’s the last one on our list of ways to reduce customer acquisition costs – customer retention.
We could also look at it from a perspective of reducing customer churn. But anyways, they both make the same sense.
Well, let’s put out the most important statement you need to know – customer acquisition costs 5 times more than customer retention. Put in perspective, you’ll be saving a lot of money when you effectively manage to increase your customer retention rate.
Also, once you lose a customer, chances are that they’ll never become your customer again. Worst case scenario, they might influence your prospects and drive them away from your business.
This is exactly why you should focus on customer retention by knowing what your customers need. Collecting feedback from customers and providing great customer support are some of the ways you can help your customers feel taken care of.
You can use an omnichannel customer support platform to connect all your support channels to one place, allowing customers to reach out to you from their most preferred channels. You can also deploy AI chatbots for support and collect customer feedback at the end of the conversation.
These are some methods that will help you understand what your customer needs and act accordingly, resulting in an improved customer retention rate. And in the long run, a huge customer base will naturally build a sense of trust towards your business in the community and automatically help lower your customer acquisition costs.
So, those are the seven steps that can help you reduce your customer acquisition costs.
Customer acquisition costs are one of the most important metrics that you need to monitor as a business. A feasible customer acquisition cost means your marketing campaigns are performing well and you can further reduce it by following the above-mentioned steps.
Simply put, the lower the customer acquisition cost, the better it is for your business revenue and growth.
So, constantly find ways to reduce your CAC – experiment, optimize, observe and repeat!