The customer acquisition costs (CACs) of any type of business play a direct role in the amount of turnover and revenue that a business is able to generate, making this a key focus area for growth and sustainable business practices that everyone should be giving some extra thought.
Lowering your CAC while maintaining the quality of new leads and quantity of successful conversions can be compared to trading a gas-guzzling truck that manages 30 kilometres per litre for a much more efficient hybrid that produces 100 kilometres per litre. Both can travel the same road and take you to your desired destination, although one will cost much more in order to get there.
So, what exactly is a business’s CAC, and how is it calculated?
An Overview of Customer Acquisition Costs and Calculating CAC
Your customer acquisition cost refers to the amount that you pay in order to attract new customers. Without careful and deliberate planning, it can be common for some marketers to believe that larger CACs will guarantee greater numbers of new customers without considering how that money is being spent. While a larger investment in customer acquisition will often bring better results, aiming for improved efficiency will mean that your investments in customer acquisition will go a lot further.
Our job here is to help you avoid throwing money away unnecessarily while still keeping customer acquisition levels high. In order to get this done though, it is necessary to learn some key tips in order to do it right, as with anything else in business.
As you will already know, converting leads into successful customers is much more than presenting potential customers with a packaged product and price tag. When calculating CAC, businesses need to consider their advertising costs, the cost of having a marketing and sales team, as well as their creative, technical, publishing, production, and inventory upkeep costs.
We are essentially looking at every necessary cost that goes into generating leads for a business up until the point of sale as well as how to get customers to return for future sales.
One of the best ways to measure a business's CAC is by using the famous customer acquisition cost formula.
The formula itself is easy to use and gives businesses a clear metric that shows exactly how much they are spending on each individual customer in a given time period. Simply calculate all of your combined sales and marketing expenses along with the other expenses mentioned above over a specified time period, be it a month or a year, and then divide that total by the number of new customers acquired in that time frame.
This is an important metric to have on hand for determining a business's efficiency and profitability. If in a year, a business spends a total of $10,000 on customer acquisition and in that year, they acquired 50 new customers, then each new customer will on average require a cost of $200.
Different business types and models along with differing customer types will affect this number. According to data from FirstPageSage, the average cost per customer for a SaaS automotive business can be as low as $141, while a SaaS insurance company might see an average expenditure of $519 per customer.
Calculating a Customer’s Lifetime Value
Extending from the CAC formula is the LTV calculation, or the Customer Lifetime Value. LTV is an estimation of how much a customer is likely to spend on your business in their lifetime. Rather than value your customers based on a single-purchase, by calculating the true value of a customer in their lifetime we can then see the ROI on the initial customer acquisition cost used to bring them in, instead of focusing just on the return generated by a single transaction.
Ignoring this calculation can make it hard to effectively grow a business into the future, since it provides a prediction for how much return will be seen per customer and therefore how much capital can be reinvested back into the business as the months go by. This won’t be a particularly useful metric if your business focuses on large, one-time purchases with no chance of repeat customers, however it is extremely helpful for those whose objective is to generate multiple purchases over time from a single customer.
There are a couple of different ways to calculate LTV for different businesses, but generally speaking, SaaS companies can calculate the average monthly revenue generated by a customer multiplied by the number of expected months within the customer’s lifetime with the business.
Ecommerce companies on the other hand can calculate their LTV by determining a customer’s average order value multiplied by the number of repeat sales in a month, which is then multiplied by the number of months relating to the average customer retention time.
Once the LTV has been calculated, it can be paired with the CAC average to form the LTV:CAC ratio. This ratio clearly shows the average return made on customers and will form a core part of understanding the effectiveness of a business’s customer acquisition investment. The effectiveness of any changes to marketing and sales strategies can be measured by regularly calculating the LTC:CAC ratio.
Strategies to Lower Customer Acquisition Costs
Regardless of the type of business in question, the first rule to think about is how retaining existing customers is much more cost-effective than acquiring new ones. Research comparing the costs of customer acquisition versus customer retention have shown repeatedly that this is because consumers are much more likely to buy from brands that they trust, and so it is much easier to convert a customer who is already loyal to your business than it is to convert a new customer.
Generally speaking, loyal customers are also likely to spend anywhere around 57% more on brands that they trust, giving businesses a lower CAC and a better customer LTV. Because of this, any business looking at improving their average return per customer should first focus on customer retention.
Once efforts have been put towards improving customer retention, businesses can then start thinking about lowering their specific customer acquisition costs which we have detailed below:
Lowering CAC for SaaS Businesses
As we outlined earlier, different types of SaaS businesses will have different average CACs which can range from just $141 to $519 and above depending on the specific business type, business model, and targeted customer type. Understanding whether you need to focus on lowering your business’s CAC
In order to identify stages in the customer acquisition process that need to be refined for better efficiency, it is helpful to break down the entire customer acquisition process into the following three stages.
- Converting a website visitor/new lead into a Marketing Qualified Lead (MQL)
- Coverting an MQL into a Sales Qualified Lead (SQL)
- Converting an SQL into a paying customer
While a visitor is anyone who visits a business’s website, they become an MQL when their engagement levels indicate that they are likely going to become a customer through site interactions and interactions with the business in general. An MQL then becomes an SQL once they have been researched and vetted by a business’s marketing department and sales team, which determines if the visitor is ready for the next stage in the sales process. From this stage, an SQL can then become a successful lead conversion resulting in a sale and hopefully, a returning customer.
Track the Funnel
Collecting data on the conversion rates between the above stages will allow you to understand which aspects of the conversion process are more successful than others and are driving your conversion rate in a given direction.
For example, it could be that while your business is able to convert 15% of your new leads into Marketing Qualified leads, only 3% of those MQLs are then converted into Sales Qualified Leads which may indicate missed opportunities within that stage.
Without a reasonable percentage of leads making it past this stage, resources devoted to the following stage of converting SQLs into paying customers might not be used as effectively as they could be. Resources may need to be reallocated from the other stages to where the problem is in order to improve the conversion rate, thus lowering the business’s average CAC by focusing on a more efficient conversion process.
Know Your Customer
In the world of SaaS businesses, your keyword strategy, when designed properly, will be like a holy grail for generating new leads, targeting individuals who are much more likely to convert rather than bringing low-quality traffic to your website and business that will not result in a sale. Regardless of whether you are employing an organic SEO strategy or a PPC ad strategy, your keywords are going to directly influence your conversion rate and can spell the difference between a high LTC:CAC ratio or a low ratio that is unsustainable.
When researching your keywords, make sure to find as much information about your target audience and be as specific as possible. Targeting a broad demographic may produce more traffic, but a low conversion rate while targeting a much more specific audience who is going to be interested in your service may generate more overall lead conversions. By being as specific as possible in targeting your audience, you not only increase your lead conversion rate, but you also minimize the amount of money spent on the strategy itself and therefore can lower your CAC.
Try the Breadcrumb Technique
When a lead clicks on an ad for a service that appeals to them and are taken to a landing page, immediately seeing form fields for personal information such as name, address, email, or phone number can make them think twice about their decision. This is because entering personal information adds friction to the conversion path and can make it feel less seamless.
With the breadcrumb technique, instead of only using one single landing page that cuts straight to asking for personal information, which may feel invasive and off-putting, it has actually been proven that using multiple landing pages and forms to “micro-convert” a lead is much more effective.
If a prospect is first presented with a form asking about their unique needs regarding your service, then they will be more willing to share this information to get the best service without revealing personal information.
This can then be followed up with additional forms regarding previous experience with the business and other non-personal questions before the personal questions are presented with them. This kind of “question warmup” primes prospects to be more eager to fill out the important forms involving personal information and agree to sign up, increasing conversion rates, while also providing your sales team with valuable information regarding their individual needs that were covered in the initial forms.
Lowering CAC for Ecommerce Businesses
Instead of relying heavily on large sales and marketing departments like many SaaS businesses to generate and convert leads, Ecommerce businesses can relax a little more and rely on customers purchasing products with minimal help. This may reduce your initial CAC at face value; however, the downside is that unless your products are subscription based and continually renew each month or quarter into the future, then you will have to put additional work into each individual sale since your customer LTV likely won’t amount to as much as that of a SaaS business.
With that being said, don’t completely ignore customer retention strategies, as these still play a crucial part for Ecommerce businesses. It may seem like only focusing on bringing in new customers is the best way to boost revenue, however this is still more expensive than making conversions from existing customers.
Experts estimate that when it comes to Ecommerce, the average conversion rate for new customers is between 1% and 3%, while the average conversion rate for repeat customers is anywhere between 60% and 70%. Finding new customers is an important part of any business’s growth, however when we also consider the fact that repeat customers on average only make up 8% of a store’s customer base but generate 41% of a store’s revenue, the value of customer retention in reducing a business’s CAC becomes obvious.
Brand loyalty also means that repeat customers are likely to spend more per order and at key times of the year, while also sharing your store more and driving new customers your way.
Keep Your Prices Realistic
If your average order value isn’t very high, then it can be tempting to increase the prices of your products as a means of generating more revenue and to keep up with shipping costs as well the related Costs of Goods Sold (COGS).
It is important that you don’t overprice your business however, since this is going to drive potential customers away and drastically increase your customer acquisition cost, since more money will be spent on each successful customer conversion as your conversion rate drops.
Collect as Many Reviews as Possible
Combining both quantity and quality is paramount when it comes to collecting product reviews for your Ecommerce business. Reviews are important for increasing your conversion rate amongst potential customers, because when a customer visits a product page and sees that there are zero product reviews, then it can signal that something isn’t right and they may question the product’s credibility along with that of the site itself.
A study by iPerceptions has revealed that around 63% of customers are more likely to make a purchase from your Ecommerce shop when there are user reviews of products, which could potentially lead to twice as many conversions and sales than if you have zero reviews. Collecting as many reviews as possible is therefore a great way to reduce your CAC since the reviews that customers can see will act as a conversion tool and take some of the stress off of your customer acquisition process.
50 or more reviews for a single product can lead to a 4.6% increase in conversion rates, and it is good to know that some negative reviews can actually add authenticity to a business and its products, although negative reviews should be kept to a minimum so they don’t completely drive customers away.
The best reviews to go after are ones that contain information about how the product was used by the customer, along with comparisons with competing brands since consumer reviews are trusted up to 12 times as much as the product description.
User-Generated Content Increases Conversions
A long list of positive reviews is a great starting point for improving your conversion rate and lowering your CAC, but the next step up from that is even more effective. User-generated content, such as short videos made by impassioned and happy customers, can boost your conversion rate by as much as 161% among customers who view the content.
This type of content is much like the digital version of word-of-mouth advertising, with happy customers talking about how great a product is on any of the social media platforms that they use, and incorporating this content into your online shop improves the chances of potential customers viewing it.
All you need to do is take a note of customers who have already left positive product reviews on your site, reach out to them, and ask if they would be happy to record a short video where they can talk about and show off the product along with any additional positive experiences that they had with your shop.
Not everyone you contact is going to create this kind of content for you, however because of how effective this is at boosting your conversion rate organically without increasing the amount of capital going towards your CAC, it is worth it. Getting just one or two video reviews from customers for each of your more valuable products can have a huge impact on how many new customers are brought in, how many conversions you make, and how much revenue you generate.
Conclusion
Learning how to lower your customer acquisition costs is not really about drastically reducing the amount of capital that you put towards customer acquisition while hoping that your business continues to grow as it did before. Lowering your CAC revolves around employing smart techniques that can boost the right kinds of traffic to your site, improve conversion rates, and retain more loyal customers who are going to support your business into the future.
Businesses should start out by understanding exactly what their CAC is by using the customer acquisition cost formula and pairing it with the average customer’s LTV for a better understanding of how much revenue a customer brings with them. From there, tracking conversion rates between the different stages of converting a visitor to a paying customer allows a business to understand where they may be losing out and what to prioritize.
With a solid understanding of the business’s CAC and more, you can then implement any of the above techniques to lower your CAC, improve conversion rates and sales, and continue to grow your business into the future while predicting the amount of revenue that you are going to generate for a more sustainable business.
