Your first aim as a business is to generate customers. Next to it is to make enough profit or breakeven to sustain the business.
But customer acquisition sometimes can be expensive. Simply ask firms who have had to run massive promotion before they ever get anyone through the door; or the ones who have had to give free upfront subscription to the public in the hope those customers will somehow capitulate and turn up with regular patronage.
However, when caution is not taken in giving first before getting, as demanded by the law of reciprocity, it is easy to give away the house. Hence, if a business is not diligent to keep a tab on how much it is investing into acquiring customers, and balance against how much it hopes to get sooner or in the long run, it run into debt.
A method called Customer Acquisition Cost (CAC) helps businesses measure and maintain the profitability of its acquisition processes.
Take for instance, if your business spends higher than it aims to get from one customer or a group of customers, that business cannot be viable. Revenue from customers can be calculated over a short period of time or a lifetime, which is more preferable. Getting to know how much you expect to make as revenue from a particular group or market in the long run will prevents you launching excessively without reins.
Meanwhile, it is also possible to be too cautious about how much you are investing in bringing in customers. When this occurs, the business may be missing out on likely customers and future revenue. Just as it is not advisable to spend too freely in acquiring customers, it is also a fine strategy when you hold back plowing enough into promotion. Most times, it is wiser to expand your market pool so you tap enough prospects.
Precisely, the challenge of the Customer-Acquisition-Cost approach is how to know the right amount to spend during the awareness, liking, and conversion and servicing phase without jeopardizing future revenue.
Some firms work with percentage of sales. The standard in many industries is to return 35% of sales back to the market by investing in building refreshing and expanding the sales pipeline. But this won’t be arrived at without good maths and the right projection.
CAC notes the total cost of making sales and all the marketing efforts deployed to acquire a customer. To arrive as at reflective sum, you sum up the expected total cost of making the sales (including sales team salaries and logistics) and marketing promotion. Next you divide the sum by the numbers of users you acquired. A positive CAC will reveal lower acquisition cost.
These are the reasons you must keep control of your CAC:
- It helps note if you are investing too much or too little in your sales and marketing effort
- Where you have invested too much, it drives you to begin to push for greater returns on investment by seeking instant patronage as soon as possible
- It helps keep track of business by emphasizing margin, not just revenue
Therefore, where your customer acquisition cost is too high – meaning way ahead of your expected return on the customers acquired – it is time to put a check.
Here are four ways to check your investment in acquiring customers and ensuring it does not get out of hand:
- Understand how many steps it requires for you to reach maximum customer awareness, liking and conversion (for instance, if your target is reaching 1,000,000 people within 2 months; you have to break the total target down into daily goals such as reaching a few thousands each day, and gauging how much the process will cost in time and personnel per attempt)
- Take advantage of your pricing system if you discover you may have to spend more in acquiring customers. You can either deploy a market skimming pricing strategy and price high if your product is unique. This will help you recover the cost of product development on time. Conversely, you may choose to deploy a market penetration strategy by pricing lower to attract more customers and gaining enough market share before competitors enter the market
- Ensure you put money into marketing channels that can fetch you quick returns at a lower cost. For instance you have to consider if using direct sales or social media or PR over adverts or sponsorship more cost and time effective than other means.
- Cut down the time it takes for customer to interact with your products. Take a direct approach. Key the customers in on the major features and experience earlier instead of telling stories or building processes that the tired and time-pressed customers may never complete.