Know Your Customer Acquisition Cost

Customer Acquisition Framework

Recently while mentoring, a business owner asked how to calculate the customer acquisition cost (CAC). Here is the easy answer:

  • Customer acquisition cost is the total cost of marketing divided by the number of new customers acquired. Here is a simple example: if an Instagram page brings in 50 customers a month and marketing spent $500 creating content then the customer acquisition cost would be $10: marketing cost ($500) / new customers (50) = CAC ($10 per customer)
  • By calculating the customer acquisition cost, a business can gain understanding about the profitability of their marketing approach. Using the previous example, if each customer is spending $50 on average on their first purchase from your business and the gross profit margin on each order is 50%, the profit would be $15 on each order: (average order value ($50) x gross profit margin (50%)) – customer acquisition cost ($10) = profit ($15).
  • For brands with a higher customer lifetime value (LTV), it may be a sound strategy to have an unprofitable customer acquisition cost on the first purchase. In other words, when the customer data suggests that acquired customers will likely continue buying from the business after the initial purchase, the business adopt a marketing strategy to spend more to acquire each new customer. 

Thoughts on customer acquisition marketing strategy tactics that affect CAC: 

  • Email — Lead generation is often the first step to customer acquisition. Generating leads involves collecting information from potential customers in order to nurture them to eventually convert them into a customer.
    • Most first-time visitors to a website won’t buy on the spot so make the elevator pitch end with an ask focused on information gathering. Collecting email addresses is seen as one of the best lead generation investments for customer acquisition.
    • According to a survey by Campaign Monitor, 59% of marketers see the most ROI from email. There are plenty of ways to build an email list, from driving paid traffic to a page with an email capture form to offering a welcome discount on the website for new subscribers.
    • Once your email list is built, run email campaigns and set up automated emails to send targeted messages to the list through email marketing services like Omnisend or Constant Contact. These emails can be personalized and triggered based on behavioral data to help turn leads into customers.
  • Third-party endorsement or word-of-mouth — The key to this marketing strategy involves finding the right endorsor to promote the offering.
    • This might include influencer sponsorships. Search for influencers who have an active, engaged following that would be interested in the product offering, as well as the creative ability to produce content that reflects well on the business brand. Be sure to provide incentives that will help build their audience and brand.
    • Search loyal customers for endorsement. The business owner should make it easy for them to recruit their friends. Nelson research has shown that word-of-mouth referrals are one of the most influential forms of marketing. People trust those they know, so when a friend tells them to check out a new product or brand, they listen. Perhaps set up a referral program in which existing customers are rewarded each time they get someone new to purchase the product offering. Apps like ReferralCandy and LoyalLion offer ways to encourage customers to refer friends through marketing emails, discounts, and incentives for both the customer and their new recruit. 
  • Paid advertising — Many e-commerce brands turn to platforms like social media, market place or search engines to run ads is because of their extensive measurement tools that allow optimization of ads to get the most out of the marketing budget.
    • Deciding which platform to use is a matter of understanding the target customer and where they spend their time online.
    • Each paid advertising platform usually charges for user impressions (how many times the ad is seen), using a metric called CPMs (cost per one thousand impressions).
    • The platforms usually allow advertisers to choose the target, based on demographics, interests, and other traits. By using these targeting parameters, a business can focus on a specific target market for prospective customers.
  • Traditional advertising  — With the ubiquity of display ads, digital marketing efforts have become easier for consumers to ignore or opt out of through ad blockers.
    • Traditional media, from small scale efforts like printed flyers to billboards can be a good way to diversify customer acquisition channels to reach a new, targeted audience. 
  • Search engine optimization — Doing key word research and implementing the findings into a content strategy for website pages can build an audience. An online following produces brand authority and it also creates an audience of customers that can be reached whenever a business wants to promote a new product or increase sales.
    • Blogging can help businesses climb the search engine rankings, bringing search traffic filled with potential customers to the website. Posts need to be full of useful, well-researched information and expert interviews that help readers make healthier life choices.
    • There are several ways to build an online audience on social media. Almost all of them require time, consistency, and content to attract new followers and keep them engaged.

For more thoughts on customer acquisition strategy and retention strategy, view the free micro-thought video entitled Marketing For Business Owners, Session 1.

Copyright ©John Trenary 2022

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