In the age of digitization, businesses need to work on several digital marketing methods to engage the right customer. Some of the major strategies are SEO, PPC advertising and content related marketing. However, your most imperative task is to evaluate which of these strategies is the best fit for your company.
The solution to this equation is your cost of acquiring a new customer (CAC). Evaluating all of these criteria allows you to evaluate and analyze the cost of engaging a new prospect. The rest of this article will give you a guideline to be able to deeply analyze your CAC, how to gauge it, and how to maximize your marketing budget.
The Importance of Evaluating Customer Acquiring Cost
CAC is an easy way to keep track of how much you’re spending on sales and marketing, and if it’s working. If your business wants to keep its P&L in positive territory it’s imperative to put an emphasis on this measurement.
Evaluating Your Business’s Profitability
The CAC metric is an important guide to the venture capitalists and investors since it provides a meaningful outlook about a company’s profitability and ratios. Investors want to invest in companies that can make them money, and this is a good way for them to gauge whether or not they will be investing in a company that can provide them with a positive return on their investment
Maximizing the ROI of Your Marketing Budget
The most important part of your marketing team’s job is to ensure its company’s growth. To do this, they must pay a great deal of attention to the CAC metric, since it helps to analyze ROI and plan future cost-effective digital marketing strategies.
Calculating Customer Acquiring Cost
To calculate CAC, the first step is to divide total revenue and marketing expenditure cost spent over the certain period by the number of new customers that have been brought on board.
The CAC equation is:
Customer Acquiring Cost = Total Revenue & Marketing Expenditure ÷ New Acquisition
The sum of entire revenue and marketing expenditure cost spreads over a range of expenditure. It is important to a look of below mentioned expenditure that should be taken into account when deriving the CAC metric:
- Content production cost
- Advertising expenditure
- Technical expenditure
- Cost of publishing
- Staff wages
- Production costs
For example, a company spends total of $10,000 on digital marketing and advertising in the first quarter of the year, and picked up 500 new customers. Their CAC for this quarter comes out to be $20.
The first step when evaluating CAC is to determine the specific time frame for which CAC needs to be determined of. CAC can calculate as per the possibility of the data. It can any particular week, month, quarter or year. Then for the same specific period total marketing promotion cost should be determined and the number of customers gained in that same specific period. The formula mentioned above can assist in calculating the CAC.
Now that the theory of evaluating of CAC is explained, let’s examine the uses of CAC.
One of the best utilizations of the metric is to compare it with other important business and competition. This way management can evaluate sales performance, marketing promotion success and customer acquisition promotions.
Computing Customer Lifetime Value
One thing to keep in mind is that these expenditures are fruitful for business growth and prosperity. It can be taken as a investment. Some investments are taken as positive, while others can unproductive. Therefore, it is necessary to gauge an investment.
One of the tools to calculate is LTV which is also known as customer lifetime value. This tool assistant in forecasting how much a customer will give benefit over a course of period engaged with the company. Many business use LTV calculations on 1-year, 3-year or 5-year criteria. LTV metrics enables the businesses to evaluate if the customer gained will be more beneficial in terms of revenue versus cost.
It is important to contemplate the below mentioned variables while gauging LTV metric.
- Buying average value: To obtain this figure, divide total sales value of certain time by the count of purchases increased during that certain time
- Buying average frequency: Divide the count of purchases during that certain time by the sum of unique customers
- Average customer lifespan: it is calculated by one over churn rate.
- Customer value: Business regular purchase sum in to regular purchase frequency
To determine the LTV, first step is to find the product of business customer value and its mean customer lifespan. This portrays an approximate of total sales value a regular customer will produce over the future period engagement with the business.
Calculating both the metrics that is LTV and CAC will assist in evaluating the course of time it takes to recover company’s investment for the acquisition of fresh customer. Typically, an ideal period to recuperate CAC is 1 year. Also, the best ration best LTV and CAC is 3 is to 1, which translate to that customer generating value should thrice the cost of acquisition. For example, if the ratio is one is to one then the cost of acquiring the customer is more than required and if its five is to 1 then devotion to customer acquisition is excessively low.
Having a sound knowledge of LTV and CAC relationship can assist the business in discovering the financial feasibilities for executing a successful campaign. It also assists in making a wise and proactive decision regarding business overheads and procedures.
Increasing Value of Customer Lifetime
Revenue can increase through numerous ways but in order to increase customer lifetime value, below two factors play main role.:
Customer Satisfaction
Running a successful business is all about satisfying the customer. If the customer is happy and fully satisfied with the goods and services of your business, then you can find different ways to make the customer invest in your business and increase revenue. According to a recent research, companies tend to generate more revenue when they make special effort to satisfy the customers.
Customer Retention
Retaining current customer base is very important for any business because acquiring new customers means additional cost for the business. When businesses want to go for new customers, they need to come up with new strategies, which definitely requires increase in budget. The most cost-effective way to enhance revenue is to invest in customer retention drives.
Refining Cost of Acquiring New Customers
Below are some of the techniques that will help to keep the ratio of LTV to CAC at 3:1:
Enhance Customer Value
Sometimes, businesses need to be empathetic in order to increase customer value; it is very important to think from a customer’s perspective and offer them exactly what they want or what they value. Smart business owners pay special attention to the interests of their customers and design product/service offerings accordingly. The best way to know what the customers are looking for is through feedback. Always take feedback from customers to understand what their expectations from you and your offerings are. This will help you improve and motivate customers to spend more on your products.
Improve Online Presence
You can improve the performance and visuals of your website to provide better experience for the customers. With the help of Google Analytics, you can now bring changes to your web page, improve mobile version of your website and reduce online purchasing issues faced by the customers.
Introduce Program for Customer Referrals
The best and most cost-effective way of acquiring new customers is through word of mouth. When existing customers say positive things about your business, it automatically attracts new customers. Therefore, introduce customer referral program where customers can record their feedback and refer to other potential customers.
Conclusion
It is imperative for businesses to be strategic while developing sales and marketing plans and investments in order to remain lucrative and sustain growth. The above metrics thoroughly explains whether companies if they are accurately utilizing all their resources or wasting them away.
Regardless of the type of business you are handling, it is essential to find balance between new customer acquisition and customer lifetime value. Business need to struggle hard to ensure that they are using appropriate techniques to maintain this ratio and maintain their competitive advantage.
