Updates have resulted in modifications to the way advertising is measured, which has raised the cost of advertising. The fierce competition for clients in the digital sphere also has resulted in a high cost of advertising, forcing businesses to spend more money on customer acquisition.
Naturally, keeping your CACs (Client Acquisition Costs) minimal is in your best interests. If you spend more money acquiring a customer but they have a poor lifetime value, your firm is not operating at its best. This article offers practical advice on how to increase revenue, rein in wasteful spending, and finally, lower CAC.
Let’s get going!
How to Estimate the Costs of Acquiring New Customers
The formula below can be used to determine your CAC: CAC is calculated as (the total spent on acquiring customers / number of consumers acquired).
In most situations, the costs listed below are included in the total spent on customer acquisition:
- Salaries for those working in sales and marketing;
- Expenses associated with advertising (sponsored content, Google Ads, social media ads, etc.);
- The price of the hardware and software that the marketing and sales teams utilize;
- PR agency.
Therefore, for instance, your CAC would be CAC = (5,000 + 2,000 + 2,000 + 10,000 + 1,000) / 500 if you paid for wages ($5,000), agency commission ($2,000), Facebook ads ($2,000), Google ads ($10,000), and software/equipment expenditures ($1,000) to attract 500 new customers; CAC = 20,000/500; CAC = $40.
To appropriately attribute income by the monthly batches instead of when a user converted, you should compute your customer acquisition expenses monthly. This is due to the possibility of a complimentary trial period, which implies that it may take some time before free consumers convert to paying clients. You can accurately calculate your ROAS (Return on Advertising Spend) and evaluate the success of your ad campaigns using a month-to-month comparison.
What Separates CPA from CAC?
Let’s spend a moment to clarify the distinction amongst CPA and CAC before moving on to the tactics you may use to increase CAC. These metrics track various expenditures at various stages of a promotional campaign even though they are related to user acquisition. CAC (Customer Acquisition Cost) and CPA (Cost per Acquisition) are different in the following ways.
CPA Refers to a Single Campaign Expenditure
The Cost per Acquisition, which is a campaign-level metric, calculates the expense of gaining a lead rather than a client. This might be a download of content, a request for a demo, a free trial, a subscription, or any other intentional submission of contact information.
Consider Netflix as an example. CPA is used to gauge the number of subscribers who sign up for something like the 30-day free trial. The company utilizes CAC to determine how much it will cost to attract the user once they have paid for the first month. Although CPA is a crucial measure to monitor, you should be more preoccupied only with the conversion rate as you move down the funnel. Depending on the character of your business, one may be able to sacrifice a lower CPA for a high ROAS and conversion to paying clients.
Total Marketing Expenditure Is What Counts for CAC
By dividing your overall advertising expenditure by the number of new consumers you have gained, you can calculate your Customer Acquisition Cost. When operating a straightforward marketing campaign, CAC is a crucial statistic to monitor, although you can also use it to evaluate your marketing success on a business level rather than a campaign level.
If your firm will flourish or fail, your CAC will let you know. There is no chance the business will expand if your CAC is larger than your customer LTV (Lifetime Value).
- Business A’s LTV is $35, while its CAC is $40.
- Unless these numbers change and they reach a better LTV, Business A is destined for failure.
6 Methods to Improve and Lower Your CAC
The following tactics for reducing your Client Acquisition Costs will help if your CAC has surpassed your company’s target.
1) Put the Right Audiences First
When you target the correct demographic with your marketing efforts and methods, you may lower the cost of customer acquisition. The majority of businesses make the error of initiating marketing initiatives before identifying their target market. Without a specific objective, businesses waste money on ineffective marketing efforts. And it usually comes at a significant cost when they do manage to get a consumer.
You must put the right audiences first when running marketing initiatives to prevent this. Based on their demands and the phase of the funnels they are currently in, divide your users into different groups. To promote conversion and sales, give them specialized, targeted information that addresses their needs at the time.
2) Fix the Funnel’s Leaks
Every step of the funnel in brand marketing results in the loss of customers who do not go to the following stage. To make absolutely sure your advertising resources are being used as effectively as possible, you should plug funnel leaks as a marketer. Fixing problems in your funnel may assist you in converting more consumers and lower your CAC if you are paying $1,000 just to gain five clients at a CAC of $200.
The sign-up rate, for instance, will be affected by the initial intake process if you are launching a social media strategy to encourage users to your app. Making it simple for users to understand how to use your software (by improving the onboarding process’s intuitiveness) can increase customer acquisition and lower CAC.
3) Split-Testing Landing Pages and Creatives
You can determine which of your landing pages and ad creatives are most appealing to your target audience by running split tests on them. To determine the best-performing units, check the CTRs (Click-Through Rates) of the different ad creatives you use.
Your landing pages’ conversion rates should also be tested. Change landing page elements like the call to action or button color and monitor how they affect conversion rates. It will be easy to do so if you build your landing page via Wix after paying for one of its nine available pricing plans. For statistically significant data needed for optimal optimization, let the A/B test run for around two weeks.
4) Specifically Omit the Problematic Areas
When you are conducting a strategy and you notice any of your strategies are not working, remove them from your marketing strategy right away. Spending additional effort on a failing customer acquisition strategy can increase your marketing expenditure without providing any measurable advantages to your bottom line.
When trying to pinpoint underperforming techniques, Google Analytics is quite helpful. To learn how each advertising platform performs, look at the conversion data. You must stop using a channel as soon as you realize it is not performing up to par in order to stop more losses.
5) Set Your Channels’ Priority
You can identify your channels with the assistance of data analysis. When it comes to converting prospects into paying clients, these platforms have a high rate of conversion. Moving forward, you should concentrate on the channels that are working the best and look for ways to increase their efficiency.
Since these channels have already demonstrated their popularity among your target users, your CAC will continue to be low when using them.
6) Try Out Affiliate Marketing Programs
Lastly, to lower your Customer Acquisition Costs, think about affiliate partner programs. Affiliate partners might persuade their followers to purchase your products because they have a close relationship with them. These schemes have the advantage that you only provide the associate compensation when a customer purchases something as a result of their suggestions.
Given that you only pay for completed purchases, this will significantly lower your CAC.
For the End: LTV/CAC – The Most Crucial and Ideal Indicator of a Company’s Health
The most important measure to use to evaluate the state of your company is LTV/CAC. The ratio LTV/CAC offers a comprehensive view of a firm and aids marketers in evaluating the success of one‘s customer acquisition attempts. While LTV indicates how valuable a client is to a biz and CAC provides the cost of gaining customers.
This ratio should be high because it indicates that new consumers are costing your company more money. A corporation can survive with an LTV/CAC proportion of 3, which indicates that new customers generate at least three times as much revenue as it takes to acquire them. A lower LTV/CAC, however, suggests that you are spending too much money to reach clients, which is unsustainable over the long term.
The CAC needs to be fixed right away in order to prevent more financial loss. The top-notch full-service data-driven agency for the marketing and creative sector can assist you if it appears that your marketing team is investing more money while receiving less in return. They will streamline your customer acquisition techniques to cut expenses and increase success.
Find one if you cannot do it on your own…