Almost every new business owner wants to get customers as soon as possible in any way he can. Often, they don't think about cost, energy, or time to do that - they just jump into marketing. However, a successful company must balance the cost of marketing and sales with how much customers those efforts bring them. In other words, you need to calculate your Customer Acquisition Cost (CAC) and determine the best option for you.
This is easier to be said than done. You have to find the right amount you are going to spend to drive new customers and, at the same time, save the revenue and the Lifetime Value (LTV) from that customer. The challenging part of this is that if you spend too much money to acquire new customers, you won't be profitable. On the other hand, if you don't spend enough, you could miss out on some opportunities and future customers and revenue.
Customer Acquisition Cost (we will use CAC later in the text) is a business model that has been used by various companies as a crucial indicator in determining marketing and sales budget. Understanding CAC, its importance, what it stands for, and how to calculate it will help business owners grow their customer base while staying profitable at the same time. To simplify, CAC is the total cost of marketing and sales efforts used to acquire a new customer. The goal is to keep the CAC as low as possible without compromising your sales and marketing strategy.
You can easily calculate CAC if you divide the total cost of acquiring customers in a specific period with the total number of customers you have acquired. Take a look at the equation below.
Every cost you have with your sales and marketing effort is considered a total cost of acquiring customers. Let's take a look at some of them.
Companies often forget to calculate this cost and concentrate only on paid ads, etc. However, this is equally important. You should keep track of how much time your employees are spending on acquiring customers and finding the right balance. You can always think about some other alternatives, such as chatbots, or automation tools such as CPQ, so your employees can spend their time more effectively, which will improve your company's productivity and profitability.
Whatever you spend while you are creating content is a cost you should calculate. Whether it is a license fee for tools that help you in creating content, such as photo editing software, grammar check, or lunch meeting for your team, put in the equation.
This goes without saying, but we will say it anyway - advertising is a cost that has to be considered when calculating CAC. Of course, this is a great way to bring in new customers, but you have to make sure that you are investing in profitable campaigns. You have to understand your target audience and understand what type of paid ad works best for you. There is no use on spending a lot of many on paid ads and got unqualified leads that will never turn into customers.
We are talking about costs you will have in order to produce content, phone call, email, or something else. If your main marketing tool is video, you will have to buy a camera, lighting, studio equipment, etc. If you plan on calling twenty potential clients that day, you need a phone, and you will also have bills to pay after that. The same goes for email campaigns and everything else.
This is pretty self-explanatory, but publishing costs are those you have when you publish your content, such as air time on TV, placement in the magazine, or a newsletter or a paid social media post.
This is the cost of the technology used by your sales and marketing team. It could be a sales tool, product configurator, SEO tool, or something else. Whatever it is, it should be calculated.
You will have costs on upkeeping and maintaining your products. Those costs can be various updates and improvements, or something else.
There is no strict rule when it comes to this (or to be fair, there is no strict rule with any of this), but most companies don't include the cost of Customer Sucess in their calculation of Customer Acquisition Costs. Why is that? The cost and efforts you are putting in customer success are mostly focused on maintaining relationships with the current customer and gaining revenue from future sales but from that existing customer.
Of course, it is part of the sales, which means it is part of your sales budget, but you have already closed the deal with this customer. This doesn't mean you should forget about it. You just have to calculate it separately and include it in your customer acquisition ratio, and not cost. This way, you will successfully measure your efficiency and profitability.
When you finally come to the point where you know what your CAC is, you can easily predict how your company will grow.
We will go more into detail and explain three main reasons why you should keep track of your CAC.
Create your perfect Sales and Marketing Strategy
You will see if you are losing money, or you could invest more in marketing and sales. This will help you create a new sales and marketing strategy, according to the results you got from calculating CAC. Not to mention that keeping track of all of your profitability metrics (and customer acquisition cost is only one of them) is essential in running a successful business.
Optimize your LTV/CAC ratio
Preparing strategies and calculating CAC and LTV (Lifetime Value of a Customer) is not a one-time job. You should be doing this quarterly to keep your LTV/CAC ratio best optimized. You should adjust your marketing and sales efforts in a way that your ratio is well-balanced. It is considered that the best LTV/CAC ratio is 3:1. This means that the lifetime value of a customer should be three times the cost you had to acquire him.
Determining and optimizing your payback period
In the first part of the sales process, you are losing money. You have expenses, salaries, etc. (all that cost that we have talked about above), and you will have your payback once your customers make the first payment. Some businesses offer freemium options, free trials, and demos, so understanding your payback period is crucial in successfully running your business.
As we stated above, your customer acquisition cost will help you measure your success and keep your company's profitability, as well as the efficiency of your sales and marketing team. If your costs to get the client or a customer is higher then his lifetime value, you are losing money, and the marketing model you are practicing is not working well for you. The best way would be to spend 33% of the average lifetime value of your customers.
If you are above that percentage, try to optimize your CAC and reduce some of the costs. Here are five ways how you can do it.
1. Optimize your funnel: Make quality analytics of your leads - how many of them are becoming customers. This will help you better understand your target audience, see who your customer is, and never take the next steps. Your efforts should be concentrate on those groups that could potentially become your customers.
2. Optimize your pricing strategy: This could mean paying upfront for the service, lowering your prices, or getting them up. There is no right answer here. You have to figure out what works best for your company and your specific situation.
3. Optimize your Sales and Marketing budget: Invest your money in the strategies and channels that are proven to work best for you. Sometimes, you will explore new opportunities, but most times, don't change what works for you!
4. Engage new prospects and customers faster: Try to reduce the time your prospect and customers need to engage with your product. There are tools, such as Helioz Product Configurator, that can help you with that.
5. Inbound Marketing: Producing quality, SEO content, such as blog posts, videos, and others, can help you get organic traffic and potential customers.
Does your business need improvement? If you are interested in implementing a Product Configurator, contact us for more info.