How to Lower Customer Acquisition Costs with Digital Marketing
Customer Acquisition Cost (CAC) as an Important Metric
CAC refers to the cost of turning a prospect into customer by persuading them to make their first purchase. This metric is of particular importance because growing your business depends on reducing the cost of gaining new customers.
But as any business owner knows, it’s easier said than done. When selling to a new customer, your success rate falls between 5% to 20%. Selling to a returning customer, on the other hand, has a higher success rate of 60% to 70% (superoffice.com).
The CAC metric is also important to investors, particularly early-stage investors who use CAC to evaluate the scalability and profitability of startups. Many of them do this by comparing the difference between the amount of money can be extracted from customers and the costs of extracting that amount.
When investors are able to determine that the CAC of the company is sustainable, they become more more willing to give that company with the resources it needs to grow, and the company can use improved profit margins to create more value for both new and existing customers to improve their position in the market.
Your company’s marketing team also needs to calculate CAC in order to optimise advertising ROI.
How to Measure CAC
Reducing CAC can help you improve profit margins and generate larger profits. Further determing the CAC for each marketing channel will help you determine which channels have the lowest CAC and therefore where to focus your marketing spend.
The more you allocate to lower CAC marketing channels, the more customers you can potentially gain for a fixed budget.
But in order to do this, you must first calculate CAC. Here is a formula commonly used to calculate CAC:
CAC = total cost of sales and marketing/cost of new customers
That total cost of sales includes all marketing and sales-related expenses and salaries. If you are unsure of the total amount spent, take out your spreadsheet and gather all your marketing receipts for that particular month, quarter or year, and add it all by channel.
You simply divide all the costs spent on resources to acquire new customers (marketing and sales expenses) by the number of customers that had been acquired in the time period that the total expenses were incurred.
This approach to CAC calculation has its limitations. For instance, if you ran one PPC ad as a test ad for one day and spent $30 total, it will appear as if PPC is the most optimal marketing channel for your business because of the low (but skewed) CAC.
How to Reduce CAC Costs with Digital Marketing
- Define your ideal customer and target them – Use your existing customers as basis for the ideal buyer persona. Look into their age, interests, backgrounds, occupations, beliefs and social media habits.
- Use retargeting – Keep tabs on site visitors who browse listings but don’t make any purchases and display ads to them when they visit other sites. This will help keep your products top of mind and persuade visitors to come back to complete a purchase.
- Use split testing – This lets you pinpoint which kinds of images, headlines, design and copy perform better at gaining leads, retaining clients and increasing overall conversions. Making improvements in these areas and tracking conversions for data can help lower your CAC.
Split testing can be done on just about any aspect of an existing marketing campaign, including:
- Landing page – Test two landing pages with both obvious and subtle differences including individual elements like font, colors and images. Even minor tweaks can have an impact on buyer behavior.
- Call-to-Action (CTA) – As an important part of your sales funnel, the CTA tells the consumer how to take the next step. Your CTA can be a a sale, account registration, download, or free trial. Split-test your CTA by changing various elements like wording, font, size or color to see which works best.
- Web design and navigation – Test images, layouts and color schemes on different site pages to see which ones site visitors will click through more often. You can also experiment with page order and page titles to find which version converts best.
- Instructions – You can also split-test instructions and subscriptions when creating product videos and tutorials.
- Invest in paid search – PPC ads and paid media will take you straight to the top of the search results, putting you in front of your ideal buyers. Paid search also lets you test different kinds of messaging and keywords as well as add extensions like offers, callouts, business phone number and links that will make it easier for new customers to reach you.
- Ramp up email marketing – Email marketing can help increase the likelihood of nurturing and converting leads qualified. Make it work for you by tapping to transactional emails, personalising direct communications, optising for mobile and using automation.
- Provide incentives – Offering limited offers, discounts rewards points, free shipping and other incentives to gain new customers. Customer rewards and a strong loyalty program, in particular, can help you create user-generated campaigns that include social media posts, guest blog posts, and customer testimonials. This is especially helpful since social media users consume up to five hours of user-generated content each day with user-generated campaigns on social media being 20% more effective than regular ads (ducttapemarketing.com).
- Don’t neglect existing customers – When focusing on acquiring new customers, don’t forget about existing ones. Returning customers also help lower your CAC and sustain business growth by giving positive referrals to friends, family, and coworkers. Keep existing customers happy by having readily available inventory, making each touchpoint memorable and creating positive experiences. Using customer success metrics can help you keep track of existing customers and their activity.
Work with a Digital Agency Today
If you don’t know where to start with CAC calculation and reduction, a digital marketing agency can help. Contevo has 15 years’ experience in PPC and email marketing. With a passion for data and split testing, we help Australian entrepreneurs unlock their businesses’ potential. Call us today to find out how you can lower CAC and improve profit margins.