Customer Acquisition Cost gives insight into profitability | Sunday Observer

Customer Acquisition Cost gives insight into profitability

11 October, 2020

The Customer Acquisition Cost (CAC) is the average individual cost related to gaining a new customer to a business. This is a lead generation metric that refers to the resources and expenditure incurred to obtain a customer.

Every business must concentrate on the acquisition cost and focus on reducing this cost to enhance the profits of an organisation. Successful marketing companies keep a close tab on the CAC and engage various methods and strategies to cut down this cost to the optimum levels.

Measuring the cost to obtain a new customer is specifically important to small and medium business owners because the information provides an insight into the overall existence. The CAC helps business owners to understand the level of profitability by comparing the amount of money spent on each new customer.

This vital information can be immensely useful to plan sales strategies. Winning companies make strategies to spend their resources efficiently to minimise the CAC. For example, if the company’s digital marketing campaigns are successful and bring adequate leads, the cost of hiring additional sales development cadre and their cold calling expenses, that is comparatively very high, can be reduced

Proper management of CAC helps to make more informed and accurate decisions, particularly pertaining to marketing costs. It is essentially vital to understand that the exercise should be done cautiously. The organisation must not spend more than the value of the customer is expected to provide over its life cycle. To control CAC, companies set goals and impose limitations on expenditure.

Typically, the CAC is calculated by measuring the expenditure during a specific period and comparing that figure against subsequent periods. For example, if the company spends Rs. 100,000 as marketing and sales expenditure in three months and acquired fifty customers, the average CAC per customer is Rs. 2,000.

Customer acquisition cost can be simply calculated by taking total sales and marketing costs and dividing it by the number of new customers acquired during a specific month, a quarter, or a year. This figure indicates the average cost per customer of the company. When calculating, marketing expenses such as promotions, advertising, publishing content creation, etc. are considered. Usually, expenditure on salaries, technical costs, transport costs, and any other related expenditure is also taken into consideration.

It is imperative to understand the breakdown of expenditure in this exercise. Therefore, the categories to identify the related costs should be done carefully.

Marketing costs

The marketing costs usually refer to the amount spent on marketing campaigns, print and electronic media advertising, digital media advertising, below the line advertising, and promotions. The salaries, incentives, traveling and accommodation expenses should be added to the calculation.

The cost incurred for outsourced third-party services such as freelance graphic designers, content creators, or video production creators should also be added to the cost. Apart from the direct costs mentioned, it is good to include overhead expenditure such as consumables and any other cost that the company may spend.

Every business entity should focus on minimising CAC to augment profits as much as possible. Optimising web presence is one of the key strategies a company can use to reduce acquisition costs. In this internet era, paying for print, electronic, and social media is not sufficient. Therefore, an effective and engaging website is an essential requirement in today’s context.

Most often, when a potential customer comes across a message from any of the available media, they invariably try to go through the website of the advertiser to obtain more details. An easy to navigate website with clear content and responsive design can produce amazing results. Maintaining an efficient website is successful and cost-effective to secure new customers. The company must make sure that they are reaching the right and relevant audience if they want to get the best out of the funds spent.

The team must understand the customer persona to target sales and marketing efforts.

For example, the target audience is teens, the organisation needs to focus primarily on YouTube where it is known that such groups spend time on that channel. Similarly, if the target is predominantly young females, Facebook ads are most effective.

For any audience and any product in Sri Lanka, Facebook can be a hugely successful channel as a staggering number of 6.4 million accounts is operational currently.

Customer experience

However, by integrating advertising in Facebook, YouTube, or Instagram with the website, the advertiser can obtain warm traffic rather than cold leads.

Acquisition strategies must be applied in varied angles and methods to gain more new customers. Using different channels and changing advertising frequencies should be done to avoid failures that may occur in a single channel method. Experimenting with varied efforts will ensure a continuous and healthy result. Using canvassing teams, email campaigns, social media efforts, and customer retention strategies by different teams in the company can be incorporated into one common endeavour.

However, the mother of all strategies is to provide an excellent customer experience to every customer as in any sales effort.

Happy and contented customers are the best method to lower customer acquisition costs. Research and experience confirm that customers trust their family, friends, and acquaintances’ opinion about a product than advice from a business or a salesman. It is also revealed that many customers do not fully trust the contents of sponsored social media advertisements.

Concentrating on providing an exceptional customer experience not only lower the CAC but also increase the customer lifetime value. Therefore, the special attention of business owners is essential to meet individual customer’s needs.

Dedicated executives should be available to look into the needs and manage any possible issues related to the product or the service.

Customers will act as natural promoters of the business if the service delivery of the company is of a high standard.

Another important factor companies should be aware of is the Customer Life Time Value (CLTV). While the two metrics are interrelated, they are different as well.

CAC is the initial cost of acquiring a customer and CLTV is the amount of money a customer spends during the time he or she remains with the company and purchasing goods.

Therefore, maintaining the retention of customers and creating a healthy lifetime value is incredibly useful to reduce CAC and increase revenue for the organisation. The bottom line is that satisfied customers will bring in new customers.

Being on the guard on the customer acquisition cost of a business is a critically important factor. It not only gives the management a clear indication of the profitability bus also provides strong results on the profits. Reducing acquisition cost in turn minimises all other costs of the organisation in the long run.

Merely by reducing CAC, the company can spend more funds on other key areas such as product development, re-investment, expansion, and diversification.