It’s no secret that leads are crucial to the success of a business, but we know from experience that leads don’t just materialize on their own. It takes time and money to generate leads and convert prospects into customers who buy from your business. These expenditures, known as customer acquisition costs (CAC), can add up.
The first step in reducing your customer acquisition costs is knowing how these costs are calculated. Use the following formula to calculate the approximate cost of generating a lead and converting that lead into a paying customer:
CAC = Cost of marketing + Cost of Sales/New Customers Acquired
In other words, you would take the total cost of everything you invested to get new customers, including your marketing and advertising costs and any other investments you made in bringing customers to your business during a specific period, and divide that figure by the new customers you obtained during that same period.
What Is a Good CAC?
If your company has spent a combined total of $500 on marketing and sales over one month, and this investment helped you acquire 25 new customers during that time, your CAC would be $20. One way to determine whether you have a good customer acquisition cost is to compare your CAC to the total amount of money a customer is expected to spend on your products and/or services during their lifetime. This is known as Customer Lifetime Value (LTV), and a good starting point is for your LTV:CAC ratio to be approximately 3:1. In other words, you want to see an LTV that is three times higher than your CAC.
Another way to gauge your CAC and determine whether your marketing efforts are paying off is to put your CAC up against industry benchmarks. In the travel sector, for instance, the average CAC is $7, the average CAC is $213 in real estate, and in the banking or insurance sector, it is $303.
How to Reduce Your Customer Acquisition Costs
If you can keep your CAC at a minimum while still bringing in high-quality leads, you can improve your company’s profitability. The following are seven ways you can reduce your customer acquisition costs:
- Retargeting: Launch an online ad retargeting campaign that reminds prospects of your products or services even after they have left your website without making a purchase. This keeps your brand top of mind and can help re-engage users who previously visited your website, bringing them back into the funnel.
- Conversion Rate Optimization (CRO): One of the fastest ways to improve your conversion metrics is through conversion rate optimization. This involves optimizing your website or landing page based on visitor behavior to improve the probability of the visitor taking the desired action on that page, i.e. making a purchase, filling out a form, etc.
- Customer Relationship Management: Improve customer loyalty and retention by implementing some form of Customer Relationship Management (CRM) aimed at managing current and potential relationships with customers.
- Improve Your Ad Copy: Determine which of your ads are delivering the best results in terms of leads. Pause low-performing ads and focus on improving and optimizing the ad copy for the highest performers to reduce your CAC in the long term.
- Marketing Automation: Use HubSpot and other automated marketing tools to deliver targeted content to a specific audience at the right time, thereby improving your conversion rate.
- Optimize Your Funnel: Analyze each step of your sales and marketing funnel to understand exactly how many visits turn into leads, how many leads become opportunities, and how many opportunities convert to customers.
- Optimize Your Pricing Strategy: A significant portion of your CAC has to do with pricing. By optimizing your pricing strategy to recoup your expenses and gain cash upfront, you can ensure that you make a profit as quickly as possible.
CAC is a good measure of your company’s growth and success, something the crew at VSSL knows a thing or two about. To learn more about reducing your customer acquisition costs or to speak to a professional digital marketer about the best ways to invest in your business, get in touch with VSSL today.