Among other metrics, your customer acquisition cost is one you should pay attention to. If you're spending too much for each new customer, you may need to adjust your marketing strategy.
You may already be measuring the cost of each new customer based on your marketing spend. Marketing certainly plays a central role in your customer acquisition cost (CAC). However, to truly understand your CAC, you have to include all the money you spend on marketing, lead nurturing, and sales. This could include everything from the cost of your sales team to your monthly marketing expenses. It could even include your phone bill.
Calculate your basic CAC by dividing all of the capital you’ve spent on acquiring new customers by the number of customers you’ve acquired:
Total Spending / Customers Acquired = Average Cost per Customer (CAC)
You can also plot your data on a graph over time to see trends.
If you are incurring too many costs for each customer, look your internal processes. Your CAC isn’t just a reflection of your marketing health. In fact, there are 3 ways your customer acquisition cost matters to your business.
Your CAC Impacts Your Revenue
Simply put, if you are spending too much on acquiring each new customer, you are losing part of your net revenue. Making a sale is always a positive for businesses. And yet, after taking a look at all the money you've spent, you may see room for improvement. After all, there are only two ways to increase revenue: cut spending or increase income.
Obviously, your customer acquisition cost isn’t the only thing that impacts your net revenue. You have to consider all of your business expenses to decide on any major changes. This includes monthly bills and operating costs. If you find that you're acquiring customers but you still aren’t reaching your revenue goals, you may need to find less expensive ways to acquire them. For example, are you still relying on cold calling for marketing? Digital marketing is cheaper and more effective.
Your CAC Reveals the Effectiveness of Your Lead Nurturing
Leads are exciting, and generating more of them is the goal of every marketing team. But if you’ve been hanging onto a lead for years and they still haven’t become a customer, you may be spending too much time and money to nurture them. In the event that one of your leads is just leading you on, it might be wise to abandon them. This won't happen often. The more likely culprit is the way in which you nurture your leads, however.
If you aren’t following up on leads effectively, they can't become customers. You’ve spent time and money on marketing to turn them into a lead. Not every lead will convert, but you want a large enough proportion to purchase to maintain a good ROI.
If you already have processes in place to nurture reads, you may need to reevaluate them and make some changes. Sit down with your team and hash out a plan that you can all conform to. Create email workflows to respond to leads effectively. Use a system to track your leads and score them. You can even send them exclusive marketing materials by segmenting them into categories.
Keeping track of all of your leads can be taxing without the right tools. Software offered by companies like HubSpot can help you manage all of your contacts efficiently through marketing automation. As a result, all of your leads will be a single workspace, you can reach out to leads on a strict schedule and keep them moving in the buying cycle. Sometimes these types of tools come with a price tag. In the long run, marketing tools will help you save the time and money, reducing your customer acquisition cost.
Your CAC Reveals the Effectiveness of Your Marketing
Unfortunately, there is such a thing as bad marketing. If you aren’t using the best strategies for your business, you may be throwing money away on ineffective ads and marketing campaigns. If you are spending exorbitantly on marketing but you aren’t gaining many new customers it might be because you’re investing in the wrong types of marketing or marketing over the wrong channels to get new customers.
Across the globe, marketers agree that some channels are best used for customer acquisition and others are best used for customer retention. For example, if you’re trying to market to acquire new customers, it’s better to focus on the following:
- Paid Search Marketing
- SEO and Natural Search Marketing
- Mobile Web Marketing
- Online Advertising
Although paid search and online advertising were named most effective, they cost more than other forms of digital marketing. If you’re on a tight budget or you are trying to lower costs, you can focus on “free” digital marketing efforts like blogging, SEO, and other types of content marketing.
Customer Acquisition Cost and Customer Retention
According to the Gartner Group, it is likely that 80% of your future revenue will come from 20% of your current customers. This doesn’t make the acquisition of new customers unimportant, but it’s something to consider when thinking about costs. The customers you’ve retained will be more easily swayed into a future buying decision if they are already happy with your business, which means you’ll be able to spend less time and money on making a sale. But customers don’t last forever and you have to earn their loyalty continuously, so make sure you have a balanced approach to acquisition and retention.
If you’re trying to retain customers, here are the marketing channels you should focus on:
- Website Optimization and Functionality
- Social Media Marketing
- Mobile Push Notifications
- Mobile Messaging (SMS)
By examining the ways your customer acquisition cost matters to your business, you can take steps to lower that cost and acquire new customers more effectively. Once you’ve gotten new customers, you can work on retaining them through the right marketing channels. Each new customer gives you a sale, but they can also offer your business lasting value. Remember, even your most valuable, lifetime customers had to start somewhere.