Know when to Fold ’em. | Customer Acquisition Cost Blog Post

Customer Acquisition Cost is a company’s total sales/profits and marketing cost required to gain a new customer. This number should include all program and marketing spend, salaries, commissions, bonuses, and overhead linked with attracting new customers.

We want to see our business web pages high ranking on search engines. We are doing a lot of keyword research, URL structuring, and create great content…. All to lower our Customer Acquisition Cost (CAC) and build an audience. Now, below is all outside of traditional marketing. It will reflect our marketing efforts, our content marketing efforts, and help us to create SEO friendly websites and content.

The Formula

Knowing your period, i.e., month, quarter or year, which you’d like to calculate.

Divide the total marketing and sales spend by the number of new customers acquired during that period.

LTV to CAC Ratio

Another metric to calculate and analyze, often more so than the CAV, is the customer lifetime value (LTV).

LTV is the predicted revenue one customer will generate throughout their relationship with your company.

To calculate LTV, you’ll need quite a bit more information to plug into your formula:

Average purchase value:  Divide your company’s total revenue in a period (one year) by the number of purchases/conversions for that same year.

Average purchase frequency:  Divide the number of purchases for the same year (APV) by the number of unique/new customers in that same period.

Customer value: Multiply the average purchase by the average purchase frequency.

Average customer lifespan: This is the average number of years a customer regularly buys from your company.

Lifetime Value:  Multiply the customer value by the average customer lifespan. This equates to the revenue you could on paper (NOT A PROMISE) attain through this customer’s relationship with you.

Your CAC is how much it costs you to acquire a new customer. It should only take you about a year to recoup or see ROI on this cost. Your LTV should be three times higher than the CAC.

Benchmarking

We all know industries vary based on various factors. These factors could be:

• Length of sales cycle
• Purchase value
• Purchase frequency
• Customer lifespan
• Company maturity

Comparing to industry standards gives us a good gauge of effectiveness. According to Propeller and Entrepreneur, here are some good numbers to compare against:

• Travel: $7
• Retail: $10
• Consumer Goods: $22
• Manufacturing: $83
• Transportation: $98
• Marketing Agency: $141
• Financial: $175
• Technology (Hardware): $182
• Real Estate: $213
• Banking/Insurance: $303
• Telecom: $315
• Technology (Software): $395

Ways to improve your CAC or LTV:

• Make it easy for your customers to purchase from you. Optimize your site for mobile, optimize for ADA, test your web copy to make it legible and easily understood. It also needs to be easily understood by recommended engines like Google. Are you creating content like case studies, video content, and more; all while incorporating meta descriptions, internal linking all that appeals to your target audience? This is where a good content marketing strategy comes into play.
• Add value to your customer’s experience. If they give you feedback, address it! Complementary product or service offerings are a great hook too!
• Customer referral program.  Reward your brand ambassadors. They are providing you with warm leads for $0 by you! Build one that your customers will want to participate in.
• Are there efficiencies missing from your sales cycle? Could you be tracking your luke warm leads better?

You know you are doing this well when you start with a high number and see a gradual decline. This isn’t just for ROI, but it is a valuable sign of your sales, marketing, and your loyalty/customer service.

Want more ideas? Need a strategy? Or, is your CAC too high? Get in contact with VLC now.