Eliminating the unknown and replacing it with data

Understanding CAC (customer aquisition cost)

It’s a basic, simple, logical business rule. In order for your business to be considered successful and profitable, you need to turn the balance in your favor, meaning that you need to earn more money than you spend. Correct, right? But how can you constantly know that this is the case? How can you be sure that you are going to profit from your business instead of trying to make ends meet? Well, by using metrics of course. An essential metric in determining whether or not you are successful is CAC, short for Customer Acquisition Cost. By means of this metrics, you will be able to determine if what you are paying to gather customers is above or under what you are gaining. If acquiring a customer costs you $10 and your monthly subscription plan is $5, then your business is not looking good.

Basically, if your CAC is too high, then you are spending too much money on acquiring customers, which can’t do your business any good. After all, your acquisition costs should not be above your profit. Entrepreneurs operating in multiple, different fields are working tirelessly to make sure they lower their CAC levels as much as possible, as the less it costs for you to gain a customer, the healthier your business is. You need to take into account that alongside the new customer expenses, your business has other bills that need to be paid. In other words, your goals need to eventually shift from gaining customers to retaining old ones so these can start bringing in new ones. Your customer base needs to turn into a free of charge new customer source. Retaining customers should become your major long-term concern.

OK, so far so good, but how can you figure out the actual value of your CAC? Like all metrics, you do require a formula to adequately calculate CAC.

You need to first identify the elements part of your formula. A set, clear period must be considered, otherwise calculating CAC might prove to be impossible and rather inconclusive. Once you have the period, you need to look at marketing and sales cost and divide them by the number of customers acquired in that period of time we were talking about. You see? Everything comes together really nicely.

So, let’s recap, shall we?

CAC over set period of time = MSCosts ( Marketing + Sales Costs)/ AC (Acquired Customers)

How to tone down your CAC?

It’s pretty clear by now, I’m sure. Keeping CAC as low as possible is necessary, that is if you want to make a profit. And who doesn’t, right? Luckily, there are strategies that can help you tone down your costs.

Establishing strong relationships with your customers means asking for feedback and actually using it. If you are not going to put the data you collect to good use, you might as well forget about asking for feedback whatsoever. It sends a really bad message to ask a customer what is wrong or how the product could be improved and after you have your response, you just place it in a drawer and forget about it. The customer who answered your question will most likely follow to see what happens. So, to reduce the value of CAC, ask for feedback and improve your product constantly.

Create a referral program. Focus on obtaining new customers through your existing ones. Use incentives to seal the deal. It’s better to invest in your already constructed client database and let them do the hard work for you. Surely, with a few good incentives lined up, they will be motivated to get the job done.

Furthermore, you need to consider your sales cycle. You might not have noticed this before, but your sales cycle might just be too long. And during this time, you are spending money, lots of money and sometimes, the money you have spent turns out to be money lost, as no actual sale takes place. So, what you need to focus on is shortening that sales cycle, to give yourself enough time as to handle other leads, which are more qualified. Shorten the length of your sales cycle to address more leads to eventually close more deals.

Now, we need to look towards conversion because this little metric can really solve a lot of issues. If conversion rates are improved, your sales will increase. Make it easy for customers to convert into leads and finally, into buyers. If you simplify and clarify this process, everything else will fall into place and you’ll start selling 24/7. Give your sales team a break, as they are already working tirelessly.