For most businesses, the cost of acquiring new customers is steadily increasing. Both the cost of trade events and advertising continue to rise and don’t guarantee results.
Purchasing contact databases and cold calling techniques are expensive. They also produce an ever decreasing return on investment. And you now need to spend a significant amount of money on Google Ads campaigns if you want to rank well for your chosen keywords.
So, what strategies can you use to reduce your customer acquisition cost?
What is customer acquisition cost (CAC)?
Customer acquisition cost (CAC) represents the average amount spent by your business to generate a customer. To calculate it, divide the total amount invested in sales and marketing by the number of customers acquired over a given period.
You can calculate it using the following formula:
CAC = total cost of sales and marketing / number of customers acquired
While this calculation might appear quite simple at first glance, the wide range of costs to take into account can sometimes make it trickier than it seems.
- Marketing acquisition costs: these can usually be easily accounted for and include things like the cost of advertising, content creation, software licences, and events.
- Marketing human resources costs: the cost of employee salaries is often not evaluated with the same accuracy or taken into account when calculating the CAC because it can be a sensitive issue.
- Sales costs: these include things like the cost of equipping the sales team, travel expenses, external qualification costs, and prospecting costs.
- Sales human resources costs: the cost of salaries and bonuses for salespeople.
The customer acquisition cost is often confused with the cost of acquiring a lead or the marketing acquisition cost.
The cost of acquiring a lead, or Cost per Lead (CPL), is the amount you spend in order to generate a lead. It can be easily calculated for each channel or by marketing campaign.
The marketing acquisition cost represents the total cost of marketing actions and marketing human resources. It doesn’t include the cost of sales and doesn’t really take into account the length of the sales cycle.
How to calculate customer acquisition cost (CAC)
To calculate your customer acquisition cost, you should first list each expense by category in an Excel spreadsheet or something similar.
- Marketing costs: e.g., advertising, trade shows, website, software, external service providers, content creation. This also includes all marketing human resources costs (e.g., employee net salaries).
- Sales costs: e.g., travel expenses, cost of promotional material and other documents, employee salaries and bonuses.
Once you’ve calculated these two figures and added them together, you just need to divide the total amount by the number of customers acquired over the given period, usually one year.
Why you should measure customer acquisition cost
Reducing your customer acquisition cost is the same as spending less to generate the same amount of sales revenue. So, it increases the profitability of your business and that’s why many companies try to improve theirs.
Once you have an average cost, you can break this down by campaign and by channels. This will give you an indication of what marketing actions to prioritize.
Our tool to calculate the ROI of lead nurturing takes this approach. Using marketing automation software will make your marketing processes more efficient and increase your conversion rates, thereby reducing your acquisition cost.
In the example used in this kit, you can see that investing £15,000 in lead nurturing resulted in an additional £72,000 in revenue over the year. This return on investment (ROI) is only made possible by calculating the customer acquisition cost.
Customer acquisition cost is also closely tied to another metric: Customer Lifetime Value (or Lifetime Value – LTV) or the value of a customer to your business. This represents the average worth of a new client to your business.
Take the example of a SaaS company whose software costs each customer £1,000 per month, and whose customers have an average lifespan of 3 years. Their Customer Lifetime Value is therefore £36,000 (1,000 x 12 x 3). The company’s customer acquisition cost therefore needs to be less than £36,000 if it wants to be profitable.
You can also use this data to calculate the number of months it takes for a customer to become profitable. This will quickly show you the importance of building customer loyalty.
How to reduce your customer acquisition cost
1. Inbound marketing
Outbound marketing techniques require ever increasing expenditure to produce results which are increasingly uncertain.
More and more consumers either don’t pay attention to or actively block intrusive advertising, both on the internet and traditional media. The cost per click of internet advertising is also steadily increasing. There is increasing competition for keywords, even long-tail ones, and this makes them more expensive in a Google Ads campaign.
As a result, inbound marketing is increasingly attractive. Inbound marketing is a strategy that allows you to attract visitors to your website (and convert them into customers) by providing them with content that addresses the problems they face.
How does inbound marketing lower the CAC?
- Your company doesn’t need to pay a new media channel to broadcast its content. You publish it on a channel that you own (your website).
- You also control how your website converts visitors into leads and customers. You can optimize the navigation structure of your website to convert the greatest number of visitors.
And it works! Businesses that use inbound marketing generate an average of 3 times as many leads. The average cost of inbound marketing is also 62% less than outbound marketing.
2. Lead nurturing
Most marketers think that the greatest challenge they face is to generate new leads. They believe, rightly or wrongly, that once they have leads, they can convert them into customers.
But most traditional marketing techniques do a strict minimum to qualify leads. Cold prospecting, for example, leaves it up to a salesperson to assess how ready a lead is to buy. If they’re hot, then great. But if they’re not, what then?
They’re put to one side. You might recontact them later. But you might forget about them altogether, because in the meantime new opportunities have appeared. And because there’s only so much time in a salesperson’s day, last month’s leads will probably never be a priority.
By putting in place a lead nurturing strategy, you can continue to send content to leads who have a shown an interest in your product or service but who aren’t yet ready to buy. And you can use email marketing campaigns to send them personalized messages linked to your offering or your product to move them forward in the buyer’s journey.
Leads will no longer remain stuck in your marketing funnel. Marketing only sends leads to the sales team when they have reached a predetermined score and are qualified. This will reduce the customer acquisition cost, minimize the number leads that leak out of your funnel, and help keep marketing costs under control. All of which helps marketing managers do more with fewer resources and justify the return on investment of marketing actions.
Digital marketing, and in particular inbound marketing, enables you to accurately measure the performance of a specific marketing campaign or channel. This data makes it easier to focus spending on actions that produce the best results and optimize each stage of the funnel.