Understanding and Managing the Customer Acquisition Cost

Every business has to grow, either by maintaining an active customer base or by adding new customers regularly. To grow, these businesses have to invest effectively to maintain an active customer base with the continuous effort of adding new ones. This whole process of investment in maintaining and acquiring new customers is called Customer Acquisition Cost which in theory is also abbreviated as CAC, alongside the existing customer lifetime value.

Now Customer Acquisition can be referred to as a standard evolving with the growth of businesses using generic marketing campaigns also known as advertisements. We see advertisements everywhere. Any advertisement which is randomly shown or displayed to you without your consent is referred to as unintended or untargeted marketing which is showing advertisements to the general population without their consent and without checking their prior interests. 

But businesses don’t grow with just random advertisements in today’s advanced world. One has to be target-oriented and aware of its users’ needs and interests. So as technology evolves, businesses evolve too and these businesses enhanced their marketing techniques as well. They had to engage their existing customers by advertisements but they were also looking to grow their customer base using a new advertisement methodology. The game of marketing was about to change. 

Now, with the new technologies like data processing, big data analytics, and artificial intelligence, these web-based businesses can engage and attract millions of users, creating targeted campaigns that are very specific to the needs and requirements of the users, convincing and enforcing these users to buy and eventually subscriber for updates. This whole process leads to a long-lasting impact on the business in the industry and its users.

image is taken from: https://neilpatel.com/blog/customer-acquisition-cost/

Calculate your CAC:

 

Now, I will explain to you the steps involved systematically to calculate the Customer Acquisition Cost. I have divided the whole Customer Acquisition Cost into three main (3) categories: Targeted marketing (advertisement analysis and its cost), Ad marketing cost, Production and manufacturing cost.

To get into the technical processing and understanding of CAC, we need to first look into the formula with which organizations calculate the Customer Acquisition Cost. So in simplest words, you can divide the amount of money you have spent by the number of customers you have gained during the time frame of that investment. For example, a dress seller invested $1000 marketing his products, successfully added 1000 new buyers in his exiting customer base, then to calculate the CAC you simply divide $1000 by 1000 new customers which make the CAC for this dress seller at $1.

But businesses do not rely on only one advertisement stream. New startups may have one, but an established business organization will have more than one business advertisement streams. In this case organizations not only check the CAC on individual streams but are also very interested in knowing the Customer Acquisition Cost across all the advertisement channels. This gives them an overview of advertisement performance against each channel and they can make better decisions on where to increase or decrease the advertisement investment. 

Across the channel, CAC assessment is the key marketing identified for the big giants of the industry. This channel's performance management can be further micromanaged on a campaign and keyword level. All responding uniquely, some of which might be more effective than others.

 

Optimize CAC for minimum financial investment:

 

With the change of weather, products change and with the requirement of change in the products new advertisements are required. This whole process of change will affect the CAC. This means that businesses can always timely improve their advertisements leading to increase customer loyalty and more and more revenue can be generated. This all can be done by constantly optimizing and improving Customer Acquisition Cost. Businesses can always do few things to improve customer service and increase revenue. 

 First of all, being an online business, one has to ensure minimum cart rejections. To reduce the chances of getting a product selected and then deleted from the cart, one has to give lucrative incentives to the customers. Incentives always attract customers. 

Secondly, your website or mobile app needs to work smoothly, with no delays, no misdirection, and no errors, because all of these things annoy the customer and he or she will eventually leave. The user experience on the app or the website is going to work as the word of mouth kind of advertisement which is beneficial for the business. But imagine what is the word of mouth is not good. This is a major loss for the business after having a very successful advertisement and CAC investment. 

 Lastly, to have constant growth and minimum Customer Acquisition Cost, businesses have to maintain a good customer relationship management system to track and records their customer activities.

By now, it is clear that Customer Acquisition Cost is a marketing expense businesses are ready to bear, expecting their advertisements to be effective enough to recover the marketing investment made and a definite increase in customer base. A well-balanced customer relation management will result in a healthy customer lifetime value with a minimum investment in CAC.

To maintain a healthy customer lifetime value index and a minimum CAC, the business’s product or services needs to have a unique viral effect which will lead towards the word of mouth and the sales connected with this. In addition to getting into a strategic partnership or an alliance to reduce the lifetime value to customer acquisition cost, some other techniques can be used as well. 

A reward point scheme is a referral program where a customer gets discounts or rewards if they refer another customer to buy a product or service from you. This will reduce the CAC of this referred customer to $0. Isn’t that a win, win situation.

 

The dependency of calculating a Customer acquisition cost may vary across different businesses and it may vary from product to product but some standard calculating points will always remain the same. These points are not limited to only the ones mentioned and discussed below but can be altered as per the need of the business. 

 

The first and far most important factor is the sales scalability, the bigger and quicker the sales operations are the better results will be seen. 
 

The second is the product purchase value which leads to the third factor i.e. product purchase frequency or product design change frequency. 

 

This leads to the fourth factor which is customer lifetime value. In the end, the last or the fifth factor for any online business to calculate its CAC is its maturity.

 

To sum it all up, every business organization needs to calculate the cost per customer, running expenses and revenue level. These are the three main goals to have a sustainable long-lasting online business. This business needs to have a minimum Customer Acquisition Cost and a maximum Customer lifetime value. Customer acquisition cost will be high only if the customer churn rate is higher than expected. 
Explaining the Customer Acquisition Cost, I would conclude this article by stating some obvious highlights. In case you’re starting a new online business you have to make a specific junk of your investment for CAC. A safer independent investment for CAC will save your business in the long run and also help to grow in multiple directions.

It will also be an important task for yourself to continuously ask if you can decrease your CAC by using other marketing schemes or whether you have to invest more than you have planned to ensure your brand’s stable online journey. This can also be done by constantly working on your no-cost to low-cost marketing schemes. For that, you have to familiarize the CAC across all the existing channels of your advertisement.

An impressive product and a high target business model are what you need as an entrepreneur to start your online business journey. But you will also need money or funding or revenue to continue growing your brand. Or you can raise your capital by smartly looking into the CAC of each advertisement revenue stream and optimize your advertisement. 

Using layman terms you need to keep a firm hold on minimum CAC and a higher customer lifetime value. Secondly, to have a successful advertisement to revenue outcome you need to ensure the CAC investment recovery within some time frame. Failing to observe or understand your CAC outcomes will eventually lead to business failure. Investing wisely and statistically growing a business is important but growing a business with bad investment to the point of complete failure is very wrong. 

Please refer to the Growth Handbook for more details. It is available at a web link mentioned here below. 

https://www.intercom.com/blog/what-is-customer-acquisition-cost/

Remember that business is a constant competition and you would not want to lose to your competitor, nor you would want your competitor to realize what you have done. To constantly evolve and save your business strategy, you need to keep your advertisements highly targeted and customer-centric. You must never let your competitor steal your customer!