How to Calculate and Reduce Customer Acquisition Cost

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    Home / Growth / How to Calculate and Reduce Customer Acquisition Cost

    You might have a thousand customers buying your product every day, but if acquiring customers cost more than what they bring, what is the point?

    This makes Customer Acquisition Cost a crucial metric that you must calculate and reduce to take solid steps towards growth.

    To reduce your CAC, you need to first calculate it. Once you know the overheads and costs that are involved with acquiring new customers, you can focus on improving your processes, closing procedures, or outreach initiatives to reduce those costs.

    Looking for customer acquisition strategies?

    Why is Customer Acquisition Cost Important?

    As a business owner or an employee concerned about the future of your company, you definitely know what your revenue is.

    It would not make sense to not learn what your costs are. Learning the cost of acquiring customers is important to maximize your profits.

    Also, one way to increase your revenue is by decreasing the costs. Reducing customer acquisition cost is the most logical way of cost-cutting for companies operating in some industries, especially software,

    How to Calculate Customer Acquisition Cost

    The simplest formula of CAC is the total amount invested in acquiring new customers divided by the number of new customers you have.

    So, if you spend $1,000 to close 100 clients, your CAC is 10.

    One benefit of such a straightforward formula is that it gives you an easy starting point from which to base your CAC reduction initiatives, but in truth, CACs are comprised of many costs that are sometimes overlooked, such as your marketing budget, the salaries of your sales teams, and any other messaging or outreach work you do to acquire new users.

    what is customer acquisition cost

    Reduce Customer Acquisition Cost in 5 Steps

    There are many strategies you can use to lower your CACs. Here are the most important and effective ones.

    1. Focus on Your Ideal Buyer Personas (and Easy-to-Fix Overheads).

    The better you are able to define your target market, the more accurately you will be able to target messaging and sales initiatives toward that market.

    If you have the right product fit, then with the right messaging, the CAC of your ideal buyer will be lower than the CAC of other potential buyers by default. Focusing on ideal buyers also ties into the idea of focusing on the low-hanging fruit of reducing CACs.

    For example, TV advertising is expensive; online ads are often more effective. Paying influencers to promote your brand can be expensive; organic growth via content generation can be more effective. Look at the sources of your biggest costs and focus your efforts there rather than trying to incrementally improve an overhead that does not take much out of your bottom line, to begin with.

    Creating customer journeys and user personas can be extremely helpful during this step.

    2. Improve Conversions.

    You may spend a lot to drive more traffic, but how many new visitors are signing up for or installing your app?

    The percentage of users who take the desired action is your conversion rate. You can improve it by identifying visitor issues such as slow load times, addressing issues faced at particular times of the buyer journey, and retargeting previous visitors who did not perform the action you desire to improve the rates at which people make it all the way through to the signup, download/install, or upgrade step of the customer closing cycle.

    You must also increase your free-trial to subscriber conversion rate if you are a SaaS.

    3. Keep an Eye on Customer Retention.

    Don’t just focus on acquiring customers.

    If you have great acquisition numbers but a high percentage of users cease to use your product or service after a certain period, then your retention numbers are an issue and you will face problems with high customer churn. This is what ties CAC with the LTV or long-term value of a customer.

    Understandably, you have to spend to close new clients, but doing so only makes sense if you can extract enough value from each customer over the lifetime of their relationship with you. How high your customer LTV needs to be is something for your marketing and accounting team needs to decide, but don’t focus on one metric (CAC) while losing focus of others (such as LTV) because of both play into how much revenue – and subsequently success – you stand to make or lose.

    Having a well-designed user onboarding process is one of the ways for improving retention as well as conversions. The easier it is for users to see the value of your offering and to enjoy those benefits, the likelier they will be to lock in with you in the long run.

    User onboarding software such as UserGuiding can help you quickly design seamless and intuitive onboarding for users of all types, thereby helping you lower customer churn, improve retention, improve conversions, and reduce CAC.

    calculate customer acquisition cost

    4. Automate Wherever Possible.

    Speed up and streamline processes with automation.

    For example, compose a warm, inviting, and personal welcome email that is sent out to anyone who signs up or visits your page, send a thank you email to anyone who shares feedback, and think of offering discounts and promotion codes to those who promote your brand and bring in new customers for you.

    This should all be automated and happen on its own, behind the scenes. It will help you reduce customer support costs, improve brand recognition, and because setting these things up is quick and easy, they can save you a substantial amount of time and money.

    5. Improve Onboarding with Clearer UPSs and Educational Content

    The longer it takes for users to see the benefit of using your service, the more time they will have to think about dropping out and not signing up for it.

    The same applies if they do not immediately understand what you are offering and how you are different from other similar services available in the market. You can improve your closing rates by making it abundantly clear what you do and why you are better than the alternatives so that customers will want to try out your service.

    Just be sure to make it as easy as possible for them to sign up take the next step because they are just as likely to lose interest if your onboarding process is clunky, complicated, or time-consuming.

    Final Thoughts

    No matter how great or ground-breaking an app or service is, it will only succeed if it is around long enough for people to learn about it and then use it, and you can only stay around long enough if you generate more from each customer than you spend on each customer.

    That said, getting your marketing and customer acquisition costs right is key to the survival of your app or business idea, and lowering them via improved retention, better conversions, articulated targeting, automation, and clear messaging starts with the right user onboarding.

    The right user onboarding includes a smooth process with a good ratio of information and UI elements combined together so users neither get overwhelmed by the complexity of features nor disengage due to unentertaining flow.

    Frequently Asked Questions

    💸 What is Customer Acquisition Cost?

    Customer Acquisition Cost is the amount of money spent on acquiring a single customer.

    ❓Why is Customer Acquisition Cost Important?

    Customer Acquisition Cost can help you learn what it takes to acquire a customer and reducing it increases your revenue.

    🚀 How do I acquire new customers?

    New customers can be acquired via channels that change depending on your industry. Increasing the traffic to your website and being active on related platforms can be a way to reach your audience.

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