Xcelerate Financial Blog

BUSINESS ADVICE FOR MARCH: COST OF CUSTOMER ACQUISITION

Posted by Evan Tarver on Jun 30, 2017 2:34:15 PM

A company's cost of customer acquisition - or CAC - is the single financial metric above all else that determines its fate. Customer acquisition cost is the average amount of dollars spent in order to onboard a new customer.

CAC can be calculated by dividing the total costs spent on acquiring customers by the total number of customers acquired for a specific time period. If a company spends $100 a month and it acquires two customers per month, for example, the business's CAC is $50.00.

It's easy to see the importance of the cost of customer acquisition metric. Lowering the per-customer cost increases your profits and creates a more efficient business. A high per-customer acquisition cost, conversely, can make a business insolvent. From a financial perspective, then, how can you reduce your CAC so that you build a better business?

1. LIMIT BUSINESS SPENDING

Just because you track the cost of customer acquisition metric doesn't mean you need to spend more money to acquire more customers. In fact, it means quite the opposite. Rather than trying to throw money at the problem, try to limit your marketing spend and challenge yourself to create a scalable business model.

You should therefore develop a CAC budget, which can help you spend your money more efficiently. When creating a customer acquisition budget, ask yourself these questions:

  • How much do your customers spend throughout their lifecycle?
  • What percentage of email subscribers actually pay?
  • What percentage of user traffic converts into email subscribers?

Answering these questions will help you set a per-customer acquisition budget. Don't think that you need a large sales staff to grow your business. Instead, look for innovative ways that have maximum leverage for a minimal cost.

2. BUILD LONG-TERM PARTNERSHIPS

Partnerships are the cornerstone of any successful business. When you're looking to reduce your customer acquisition costs, seek out potential partners. Partnerships create a sustainable business model that's optimized for long-term success.

When faced with rising customer acquisition costs, the right strategic alliances can reduce expenses while increasing overall market share. Your company, through these potential partnerships, can gain exposure to new audiences and consumers, tapping into a well of opportunity at a low cost.

The beauty of a partnership is that it's a win-win. So, when you're looking at your CAC, search the competitive environment for another company or organization that can benefit from your business, and vice versa. The result is a reduction in per-customer acquisition costs for both organizations.

3. TEST NEW CHANNELS

The issue with customer acquisition costs is that acquisition channels get crowded over time.

For example, Facebook advertising, when it was first rolled out, provided advertisers with relatively low CPC and CPM costs when compared to other options. However, as more and more advertisers entered the space and started using the channel, demand increased and the supply of available ad space decreased. This caused a rise in CPCs and CPMs, thus increasing the cost of customer acquisition.

When an acquisition channel becomes popular, it doesn't mean it's become less effective, only more expensive. So, if you're looking to reduce your CAC, it's important to keep your eyes out for new channels.

The people who capitalize on low customer acquisition costs are usually the early adopters of a channel. They have a lot of short-term success, and their results attract a flurry of activity. However, once that activity comes, the opportunity has most likely already passed.

To become the early adopter of a new channel and reduce your CAC, make sure you test multiple channels, and test them often. You might allocate the majority of your budget towards a known commodity, but if you keep testing the waters of new acquisition opportunities, you'll always be able to find a lower-cost alternative. 

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We currently serve clients from many industries, including internet start-ups, established traditional companies, and software/technology companies. 

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