How to calculate and reduce customer acquisition costs

How to calculate and reduce customer acquisition costs
    On this blog post, you'll learn:
  • A practical way to calculate Customer Acquisition Cost;
  • Why think about CAC Per Marketing Channel;
  • 8 strategies to reduce Customer Acquisition Cost (CAC).

Calculating and reaching the minimum customer acquisition cost (CAC) is, possibly, the main goal of a lot of marketing professionals around the world. People know they have to do it, but a lot of times they have no idea why or how. Some people don't even know what it is, exactly. It's like an amorphous milestone people try to reach, but without knowing how.

The customer acquisition process involves two main things: investment and revenue. Knowing how much the company is spending on marketing to convince potential customers to convert is crucial to determine pricing and shaping the product itself, as well as understanding what personas are more profitable to your company and what strategies to use.

In fewer words, CAC affects:

  • Return Over Investment (ROI): when you know how much you're spending and how much you're gaining per client, it's easy to compare that to your budget and determine what is your ROI.
  • Customer Lifetime Value (LTV): both CAC and LTV take the average customer ticket (amount spent per month) into consideration, but LTV is also worried about how much they spend overall (in a year or for the amount of time before churn). Ideally, the proportion between LTV and CAC should be 3 (LTV/CAC) for SaaS companies.
  • Monthly Recurring Revenue (MRR): this is where your rough income will come from, and it's a combination of CAC, LTV and ROI. Plus, MRR and CAC can be relatable through the metric "Months to Recover CAC", meaning the amount of time it takes for new customers to break-even on the investment to get them. The lower the CAC, the less time it will take to pay off the investment.

Basically, Customer Acquisition Cost (CAC) might not be the number one reason for determining the success or failure of a company, but it should be very high on a company's list of priorities.

Although everything I said up until now might seem a bit obvious to some of you, the truth is that some companies still forget to take CAC into consideration. I know you understand the importance of taking CAC, of course.

New technologies have made it so much easier to acquire new customers, people forget to see how much they're spending and only focus on overall revenue. This ends up masking your results and might be deadly to a company that runs on a tight profit margin.

CAC is a great way to see if a business is strong enough to make money and grow, or if they need to change strategies soon. Measuring your CAC will help you put things in perspective, plan out your marketing expenses and estimate your revenue.

Practical way to calculate Customer Acquisition Cost (CAC)

Calculating CAC is pretty easy at its basic stages. The basic formula is:

Practical way to calculate Customer Acquisition Cost (CAC) - Pipz

CAC Per Marketing Channel

This is where things start to get interesting. Strategically, your company will want to spend less to get more customers, right? That means keeping CAC low, of course. But a great way to do that is by focusing on strategies that have the lowest CAC and combine them to reduce the overall cost.

The logic here is: if you have a fixed marketing budget but you need to get more customers, spend on lower CAC channels.

Let's use the three main strategies companies use: paid online ads (Facebook and Google), Inbound Marketing and Outbound/Events.

Let's say your marketing budget for 2016 was $ 50,000. You got 1,000 new customers during the year. For this case, we don't need to count customer churn.

  • Your average CAC is $ 50.
  • Following the proportion we've mentioned before, your LTV should be $150.

Now, let's see which strategy is more profitable.

  • PPC (Pay-per-click Ads): your company invested $1000 and got 30% of its new clients this way. Therefore, the PPC CAC for the analyzed period is $3,30.
  • Inbound strategy: here you'll consider production efforts from your team, distribution, etc. Let's say your company spent $29000 on inbound and got 40% of clients this way. The Inbound strategy's CAC is $72,50.
  • Outbound/Events: these strategies were responsible for 300 new customers and costed $20000. The customer acquisition cost here is $66,66.

This shows that the most profitable strategy is PPC. But be careful with assumptions! What if your average ticket for Outbound sales is way higher than the one from PPC?

This is to say that even though the cost of a certain strategy might be lower, spending a bit more in strategies that bring in better paying clients might just pay off!

What is the acceptable Customer Acquisition Cost (CAC) for a company

As I've mentioned before, a great CAC to aim for is a 3:1 proportion with LTV.

CAC and LTV proportion - Pipz

It's normal to spend more time and effort in customer acquisition at first, however, what cannot happen is to stay below the break-even line. If you are, stay tuned for our tips on how to reduce customer acquisition costs (CAC).

Also, and I think it's pretty obvious, the total amount spent by your company on acquiring new customers should be lower than the revenue value that existing customers generate (MRR or ARR). The best rule, in this case, is to be spending 33% or less of your LTV on acquiring them.

There is another thing to consider: do you know what is the LTV of each channel you consider on your CAC? Of course your CAC is an average from your whole operation and you might even have the CAC from specific channel strategies, but hardly any people will take the time to calculate the CAC from each channel.

This means that some channel might bring better paying customers, while others bring in more customer but with a lower ticket or higher churn rate. So, in short, remember to think about channel LTV as well, to have an even more profitable strategy.

8 strategies to reduce Customer Acquisition Cost (CAC)

1. Speed up your sale cycle

The logic here is pretty basic: the longer it takes to convert leads to customers, the more you'll have invested and the higher your customer acquisition cost will be. Therefore, you need to shorten your sale cycle so that the accumulated investment is lower and you're able to increase your ROI.

First, you need to attract more of the right leads to your business (which we'll talk about in a sec), and then you need to make sure that they're going to go through the funnel. To do the latter, you'll need to optimize your nurturing strategies, and that's possible using marketing automation.

Did you know that companies who invest in marketing automation solutions see 70% faster sales cycle times?
  • Automation for nurturing allows you to reach more people with the same amount of effort, in a more focused and direct way, and without the need of a person doing that work manually.
  • Lead scoring is a great way to segment your leads according to their behavior (like pageviews, filled webforms in landing pages, etc.) and fitting them into a better strategy with bigger chances of conversion to client.
  • Lead tracking makes it possible to follow your lead around your website, blog and landing pages, for example, see why your acquisition strategy might not be working as well, confirm what they are looking for and adjust accordingly.
  • Automation with boards: an option to integrate the work between marketing and sales is creating automations with milestones. That's a great way to deliver hotter MQLs and SQLs to the sales team.

Segmentation, quicker responses, and follow-up are also benefits provided by marketing automation. All of them combined accelerates the sales cycle and makes it easier to close deals.

2. Attract more qualified leads

When it comes to getting new clients, attracting the right kind of lead is half the job. In this case, a powerful automation tool can be a great ally since it allows you to create landing pages and web forms that collect information that your company needs to reach out to them.

It's a way to make sure that you are getting the hottest leads, and that's what will increase your conversion rates and lower your CAC. But there are other ways to get more qualified leads:

  • For Google Ads: invest in long-tail keywords. They tend to be cheaper and have a smaller search volume, but people searching for these terms know what they want, and are more ready to spend on it right away.
  • For Facebook Ads: use the information from your clients, like demographics, profile and behavior, to invest in even more segmented ads. You'll reach a smaller number of people, but the tendency is that you reach the right people and increase your clicks.

3. Improve your conversion metrics

As you spend money to acquire traffic, your sales volume depend on how much of that traffic you can convert into paying customers. The higher your conversion rate, the lower your CAC.

42% of B2B marketing professionals say converting leads into customers is their biggest challenge, and 25% don’t even know their lead conversion rate.

Here are a few ways to do it:

Offer social media opt-in

People tend to go for the easiest option, and social media opt-in is definitely easy! Just press a button and you get what you're after - ebook, spreadsheet, PDF. This strategy is also great for the company, that ends up collecting more information than they would with a form, and can create better ads on the corresponding social media channel.

But don't forget to offer a web form option as well, since not everybody will want to use social media.

In-site pop-ups

Using pop-ups for op-tin, such as newsletter subscription, demo requests or other types of forms is a great way to encourage your visitor to fill in their information. That's a first step, and it gives you the opportunity to get a large volume of leads, segment and nurture them.

Call-To-Actions (CTAs)

These resources can be used in many forms and different materials. They can be an image, a phrase, a link, pretty much anything, as long as it calls the reader to a specific action, usually accompanied by a benefit. They can be aggressive or humble. Try them out and see what works best for your company.

A/B Testing

When looking for improving certain metrics, such as conversion, A/B testing is a great strategy. In cycles, you'll gradually start making changes to layout, mostly, and see what drives better results. This can be the color of a button, the position of an image, a certain icon.

But remember that you can't test two or more changes at the same time, as well as comparing totally different options. After all, you need to understand what is bringing you better results and explore that further in your strategy. What you can use A/B testing for? Landing pages, CTAs, position of pop-ups, website navigation, etc.

4. Referral strategies

Referral is one of the most important stages of your customer lifecycle, and also a great strategy for acquiring new clients. It's a great way to get new accounts at a low cost and the chances of retention are 16% higher than a non-referred one. We have a content all about creating a retention program for a company, so check it out!

5. Low-dollar offers

This is a great way to get new customers! Using campaigns combined with a low-dollar offer for a product that is relatively low-cost for a company can be a way in for clients that you can, later, work on upselling.

Example: you are a SaaS and your average price per month is $70 for the basic plan. You don't offer trials or have a freemium strategy and your average monthly target is 100 new customers. In this scenario, your low-dollar offer might be a $10 dollar trial week. You'll be losing $7,50 for this week x the number of clients you get. But once the week is done, you might have 100 customers that paid for this week.

So instead of having 25 new customers this week bringing you $1,750 in revenue, you'll have $1000 in revenue. But of those 100 trials, 30% decided to sign with you permanently, So, overall, this action brought you $1.732,5 (cost for the remaining 3 weeks of the month for these 33 customers) + $1.000 in trials and an increase in MRR.

Even though your ROI might suffer a bit on this type of actions, you'll be able to get it back on volume.

6. Think about marketing automation

Automation was mentioned on previous item, but there is so much you can do with it! From creating better landing pages to segmentation and automation flows, and even user onboarding (we'll talk about this next), marketing automation offers you a lot of options!

Check out a few content below:

7. Reduce churn (it will increase your LTV)

It might not seem like churn is related to CAC, but it actually is. The image we showed above, with the break-even line, shows that. Having more money coming in from customers makes it possible to spend more in getting them.

So, increasing the customer's lifetime value can result in having a larger CAC. Great, right?

If the churn rate is the number of customers that leave your company divided by the number of customers that you've acquired, and LTV is the total revenue acquired from a client divided by the time he stayed in your company, you can picture that the lower your churn rate, the bigger your average LTV.

The good news is that there are a lot of strategies for customer retention and this step can be automated to a certain extent, without it needing to take up a lot of time and attention from your team in developing new materials.

Retaining customers means delighting them. So, you need to focus on the customer experience. Nurture customers at the right time and with the right content. Focus on onboarding, provide real-time assistance and be sure to be there whenever your customers need. Here are a few ways to do it:

8. Increase team productivity

Time-saving is the goal of a lot of people and there are some ways to do it, especially if you already use a marketing automation platform. By automating some or many of the marketing tasks, such as sending out email campaigns and creating analytics reports, you allow your team members to do other things that may require more time or attention.

We've have talked about this in our blog before in this post: How to perfect content marketing strategy with process management.

We've have reached the end of the content! Recapping, whilst in growth phases it's acceptable to have a relatively high CAC, in order to get a place in the market (and therefore extract more value later), the cheaper you acquire each customer, the faster you will grow.

The tips we gave you here should help you in that process.

If you try anything out, let us know how it goes! And don't forget to share with us any more tips you might have.

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