In only a few short years, the cost of acquiring new customers has increased more than 60%. And with the boom in digital marketing, the cost of advertising to gain your target audience’s trust has also doubled, if not tripled in some industries.
As a business owner, you may have already tried your hand at marketing on digital platforms and on other avenues, only to fail to see the results you were hoping for. Does that mean you’re doomed to a life of guesswork marketing? Absolutely not!
Acquiring new customers is an art. While a clever advertising strategy might capture their attention, it’s the steps you take afterwards that helps you onboard new customers.
My metric for success can be summed up in one phrase: earn customers for life.
In this guide, we’ll discuss what customer acquisition is, the best ways to lower the cost of customer acquisition, and how to leverage your current customer base to increase lifetime value.
What is Customer Acquisition?
Customer acquisition is how you acquire new customers. While every business has a specific strategy, the end goal is ultimately the same: encouraging qualified leads to take action and become loyal customers.
In some aspects, this strategy seems quite similar to a marketing strategy or campaign. However, there is a difference between the two: marketing builds brand awareness, while acquisition converts leads into customers.
For instance, say you run a series of Facebook ads specifically tailored to reach your target demographic. Analytics show how well the ads performed and whether you reached your goals. In a nutshell, that reach is your marketing. Customer acquisition, on the other hand, is what happens after someone clicks on your ad and lands on your website or signs up on your email list. At this stage, they are known as a lead. Only when they go a step further and make a purchase do they become a customer. That’s the goal of an acquisition strategy.
In its simplest form, marketing increases recognition while acquisition boosts ROI.
Regardless of size or when you opened your business, customer acquisition is what keeps your business thriving. No matter how long you’ve been in business, every company needs to master the process of converting leads and building long-term relationships with their customers.
When done correctly, acquisition will:
- Provide revenue to cover operating costs, payroll, and reinvestment into the business
- Provide demonstrable proof to potential investors that your business is a worthwhile investment
- Flexible schedule and more freedom
Creating a strategy that converts leads into customers is what helps your business grow and keeps your investors happy. But to get to this point, you also need to understand what happens between lead generation and customer acquisition.
Customer Acquisition Funnel
CAC funnels are similar to marketing funnels. They describe the journey leads take prior to becoming customers.As leads move through the funnel, they will:
- Learn more about your business (brand awareness)
- Determine if you can solve their problem
- Ultimately decide whether they want to become a paying customer
While we can break up the buyer’s journey into different stages, the customer acquisition process is the funnel as a whole. To simplify the process further, lead generation happens at the top of the funnel, consideration in the middle and conversion occurs at the bottom.
Calculating Customer Acquisition Cost
Knowing how to accurately use this KPI can help you make better marketing decisions as your business grows.
Calculating your CAC is a pretty straightforward process. However, there are different ways to go about it. In its most basic form, you divide the total cost of acquiring new customers by the exact number of customers gained during a specific timeframe.
The formula looks like this:
For instance, if you spent $200 a year on marketing campaigns and gained 200 customers, your CAC is $2.00.
If you want to delve deeper, you can include all the associated costs including specific ad spend, wages paid to marketers and influencers, and the cost of CRM software used during that time.
This formula would look like this:
To gain a better understanding of how calculating CAC works, let’s look at another example.
Let’s say there’s a brick-and-mortar store that sells candles. They spend $5,000 on sales and $1,000 on marketing campaigns to attract new leads.
The CAC for this business would look like this:
CAC = 5,000 + 1,000 = 6,000 / 1,000 = $60.00
As you can see, while both formulas can be used for single campaigns, both can be used for specific time periods as well.
You can also calculate the CAC using a channel-based formula. Using this method, you calculate the impact of each separate channel.
At this point, you might wonder if this is really necessary. After all, if you’re growing and acquiring new customers, do you really need to know where they came from? The answer is a resounding yes.
Knowing which marketing channels provided the lowest CAC will help you refine your marketing strategy to lower the cost of acquiring those customers even more.
Create a spreadsheet in Google Sheets or Excel; list each marketing channel you advertise on, the ad spend, and the total ad run. You should also note how many conversions came from each channel, if applicable.
For example, how much did you spend on Facebook advertising in comparison to PPC campaigns on Google? What was the difference in performance? Weigh the cost vs. benefit based on your goals, i.e. new email subscribers, more leads or total conversions.
Ultimately, you want to optimize the platforms that bring the greatest performance for the lowest cost.
CAC vs. CLV
Customer lifetime value (CLV) is another KPI you need to know. CLV is the amount of money you make over the duration of a customer’s relationship with your business. The longer the average customer relationship, the higher the CLV.
With that in mind, there are several variables to consider when comparing CAC and CLV.
As fundamental as lowering CAC is, it can also be slightly deceiving. In addition to the varying costs you can use in the formula, you also need to consider the profitability associated with each customer. That’s where that’s where CLV comes into play.
The most important aspects of marketing and acquisition are customer retention, upselling and cross-selling of products and services.
For example, if your business model is subscription-based, obviously you want them to renew their subscriptions continuously on a monthly, quarterly, or annual basis.
On the other hand, if your business is product-based, then the goal is to find ways to increase their initial purchase and retain them as life-long customers.
How to Improve Customer Acquisition
In a perfect world, all of your marketing efforts would build long-lasting relationships with new customers and boost your ROI. And while many of your efforts will have a positive effect on CAC, there are more specific ways to target and improve this KPI that we’ll talk about now.
One of the easiest ways to lower customer acquisition costs is by adding value. But since value is subjective, copying what your competitors are doing isn’t guaranteed to work.
Prospects and current customers want to know their opinions are important, so you need to go to the source.
Interact with your target audience online, and ask them what they want. If you have an email list, you can send out surveys asking for their feedback.
Prospects want to know they’re making the right decision, so it’s up to you to provide them with what they feel is valuable.
Use CRM Software
Most businesses use some type of customer relationship management system (CRM). These typically include cloud-based prospects and customer tracking software, email list builders, loyalty programs and abandoned cart auto-responders. These types of programs can increase the actions taken by prospects, which can lead to conversions.
Assess Lead Conversion Rate
Use Google Analytics to assess your lead conversion rate and find out at what point in the sales funnel you’re losing lead. Learn how often customers abandon their carts, if they make it to checkout but leave before finalizing the transaction, and other information that will help you determine where you’re losing potential customers.
You should also run speed tests on your website to ensure fast loading times with streamlined navigation. No one wants to jump through hoops to complete a purchase.
Your website also needs to be responsive. Mobile buyers now make up over 60% of the US population. By 2024, experts predict that approximately 187.5 million people will have made at least one purchase from their mobile device.
Prioritize Your Audiences
Shotgun marketing, or mass marketing, used to be considered the best way to reach the masses.
Unfortunately, this type of marketing usually resulted in qualifying the wrong type leads. More specifically, these leads provided little to no value and probably wouldn’t convert.
Your marketing efforts need to resonate with the right audience. In today’s digital landscape, consumers want to do business with brands that personalize their interactions.
They want brands to be genuine and present content that lives up to their expectations. You need to create multiple buyer personas prior to launching your marketing campaigns. In this way, you’ll target consumers who are most likely to convert.
Identify Acquisition Marketing Channels
Your acquisition channels are the channels where your ideal leads spend most of their time. These channels will depend on your type of business (B2B, B2C or DTC), in addition to your marketing strategy and financial resources.
Create a Referral Program
When current customers refer others to your business, and they eventually convert, your CAC is $0! These warm leads that convert can lower your total CAC over time, so make sure you put effort into building a solid referral program.
The biggest crux of your program should be creating value for existing customers on top of what you’ve already provided. It has to motivate your consumers to bring others onboard. A 10-15% discount for both parties, credit, or even a small freebie for each referral are great incentives.
If you’re not sure what to offer, simply ask your current customers what they want. You can send out email blasts or start a conversation on social media. Customers want to feel connected to the brands they do business with, so asking their opinion is a win-win situation.
Fine Tune the Sales Cycle
Shorten the duration of sales promotions so you can increase the quantity of sales you run each year. You can then use prospecting tools to connect with qualified leads.
For example, if you usually run pre-holiday sales 30 days in advance, try shortening the sale to only 14 days. Content should create a feeling of urgency and make qualified leads want to take action.
In addition, you also need to focus on the top-performing channels and create funnels that encourage leads to convert. You can accomplish this by directly addressing your target audience’s pain points.
Make Customer Retention a Priority
How you treat your current customers is just as important as how you attract and convert qualified leads. Current customers need to know that you value their business. If not, they might start looking elsewhere for that attention.
And as hard as it is to accept, loyal customers sometimes want to move on. As much as you might want to try to win back churned customers, it’s better to focus on the customers who are still with you. However, you still need to know the customer turnover rate, and that brings us to our next point.
Know Your Customer Churn Rate
Customer churn is the percentage of customers who opt out and no longer want to do business with you. Keep in mind that this happens for a variety of reasons; it’s not always because you didn’t provide them with what they wanted. Sometimes, customers churn even if they’re satisfied with your business because they just no longer have a need you can meet.
Just like you, your customers’ wants and needs will change. For this reason, you need to know the percentage of customers who opt out and find a way to retain them. Why? Because it will always cost more to acquire new customers than to retain the ones you already have.
With new businesses springing up literally overnight, “customer acquisition” is no longer just a marketing buzzword. It’s now one of the most important parts of your marketing strategy. At the end of the day, customer acquisition is about attracting the right kind of customers; the ones that not only stick around but go on to become brand advocates. Fine-tuning your customer acquisition process and learning what works best for your business will keep your cost of acquiring a new customer as low as possible.
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