Got a business? Need revenue? Then you should familiarise yourself with CAC if you are not already.
Customer acquisition cost (CAC) is one of the key metrics for any business that relies on getting customers for revenue to survive (and thrive). Needless to say, that’s only about 99% of all companies. CAC refers to all the sales and marketing costs needed to get a customer. To calculate it, take the entire sales and marketing costs over a given period. Include salaries and other related expenses, then, divide it by the number of new customers.
The reason CAC is important is that the viability of your business model depends on it. To be clear, costs to get a customer are high today, and high CAC is the main reason online businesses fail.
It’s quite meaningful to talk about CAC without mentioning another key metric, namely the Lifetime Value of Customer (LTV).LTV is the ability to monetize the customer. No matter how efficient your customer acquisition, if you can’t generate revenue higher than that you’re ultimately losing money. In general you should aim to recover your CAC within a year.
An excellent business model has an LTV to CAC ratio of 3+. That means an acquired customer generates at least three times the CAC.
It can vary, however. For example, a SaaS startup would need a higher figure to scale fast while local e-commerce business may do well with anything over 1.
So it’s all about increasing your LTV while bringing your CAC down. Here are some ways to achieve the latter.
1. Improve Your Conversion Rates
As you spend money to acquire traffic, your sales volumes depend on how much of that traffic you can convert into paying customers. The higher your conversion rate, the lower your CAC. A/B testing, a term you’re surely familiar with forms the basis of improving conversions.
As Peep Laja of ConversionXL points out, “real estate is about location, location, location. Conversion optimization is testing, testing, testing.” It’s very important. Instead of relying on hypotheses, you get data, and that’s what makes a business successful. Noah Kagan, who scaled AppSumo to 500,000 members in its first year, started up with an employee whose only job was A/B testing.
When improving your conversions, focus on the copy, structure, CTA layout and design, trust marks, testimonials, emails, etc. Another way to boost your conversion rates is to invest in retargeting and email marketing. Some visitors take some time to make their buying decision; that’s why you want to stay in touch.
For more on conversions rates and some cool examples check out our earlier post.
2. Referrals & Virality
If you can get each of your customers refer their friend, then congrats, you just managed to cut your CAC by 50%. It’s no surprise that referral marketing fuels the fastest growing companies.
For example, Uber, now a $40 billion taxi marketplace hasn’t been spending much on its marketing. According to it’s founder, Travis Kalanick: “I’m talking talking old school word of mouth … 95% of all our riders have heard about Uber from other Uber riders.”
The startup has fueled its word-of-mouth growth using smart publicity stunts and referral campaigns. According to a Wharton Business School study, 83% of satisfied customers are happy to refer a friend, but only 29% do so.Another study from 2012 shows that a referred customer has a 16% higher LTV.
So if you haven’t invested much in your referral marketing, you absolutely should. Tools like ReferralCandy or Justuno are a good way to start. We should note here that word-of-mouth is not the same thing as viral marketing. While word-of-mouth relies on customer doing a favor, virality is engineered in the product itself.
In other words, customers promote the product just by using it. A classic example is Instagram’s cross-posting feature or the ‘sent from my iPhone’ signature. When iPhone was an unproven new product, this helped to grow the brand perception as customers promoted the product with every message or Facebook post.
Another great example is GrooveHQ’s test on their form footer by adding a ‘powered by Groove’, a test that increased referrals by 30%. Thats 30% for simple adding their link at the bottom of the form.
3. Invest in Support and Onboarding
Getting traffic is easy. Even activation of that traffic is relatively easy compared to customer retention. For mobile apps, 90% of downloaded apps get deleted or abandoned only after used once. For web products, the numbers are even worse.
A SaaS study from 2013 shows that only about 2.2% of acquired users ever transition to paying customers. The science of engaging acquired users into active customers is called onboarding.
It involves a mix of selling, educating and using your product or service. Most potential customers lapse because they don’t ‘get’ the value of the product or they feel lost. At the very basic level, you want to provide a great customer support and possibly a live chat. Once users complete the sign-up or another form of activation, you want to follow up and offer a helping hand or time-limited incentive.
There are plenty of toolsto help you manage this part of user onboarding. However, before you even start take a look at UserOnboard a site dedicated onboarding best practices. I spent hours reading through so make sure you have time on your hands before you venture there.
4. Marketing Automation
Marketing automation software can help to grow your business in multiple ways. Among them, by improving your lead generation, email targeting, measuring & reporting and more. What makes automation so powerful is that it reduces the number of human work required.
Just compare the cost; for the average business, salaries account for 70%-80% of all expenses. If converting one customer requires e.g. 5 minutes of human work, the cost of those 5 minutes may buy you a three days worth of marketing automation software subscription.
One of the powerful features of AdWords is automated bidding. If used right it can be huge time and cost saver. For example, a popular online fashion store ModCloth used automated bidding to reduce their CAC by 14%.
5. Pareto Principle
Pareto was an Italian economist who first identified so-called ‘Pareto rule.’ The premise of the rule is that 20% of your actions lead to 80% of your results. Just as he found that 20% of his trees yielded 80% of all the fruits, many managers found a similar ratio when it comes to running their business.
While the actual ratio may some something like 70/30 or 90/10 you may find, it applies to many aspects of your business too.
For example, some 20% of your ads will deliver 80% of your sales. Or 20% of your user acquisition channels will result in 80% of your business. Same goes for leads, keywords and even day to day task management. Y
ou want to double down on what brings results and find a way to either outsource, automate or kill the rest. For example, a friend of mine found that salespeople in his company waste over 80% of their time on lead research. What he did, he outsourced this work to freelancers and let salespeople focus on what they do the best – selling. Their revenues doubled that month.
6. Mix It Up With Free Channels
Paid advertising costs money, but it works. However, there are many short and long-term opportunities to get customers for free.
One of these channels is PR. Sometimes it’s a one off opportunity such as the announcement of launch or getting investment. Another time it may be something long term such as getting a regular guest column at the popular online publication.
A separate mention goes to publicity stunts. Number of successful companies have used this tactic. Richard Branson and Virgin Airlines is a classic example, Uber a more recent one.
Partnerships are another powerful way to get users for free. There are countless examples of businesses using this tactic to achieve faster growth.
A high profile example would be a recent Uber – Spotify partnership. Another one I got across lately is a more everyday example.
A friend of mine who runs a dance school made a deal with local jewellery shop. Every time someone buys a wedding ring they get a bonus: a free dance lesson to prepare for their wedding. Everyone wins.
7. Constantly Innovate
Whatever you do always keep innovating and improving. There are always new options and opportunities coming up. Likewise, new customer acquisition channels become available while some of the existing ones might get improved.
Focus on what works but keep your eyes open for new ideas and most importantly test them out. Ideally, you want to have a small fraction of your budget set aside for such experimentation.
A good model for innovation is the lean startup loop. What you want to do is to form a new hypothesis, put aside a small chunk of money to run a rapid test. Measure the results and collect the data. The data will either confirm your hypothesis or bring a new light into it, hopefully enough to form another one, that’s more likely to a desired result.