How do customers find your business?
Does your company frequently sponsor podcasts? Do you heavily lean into paid digital advertising? What about SMS marketing?
Here’s the ultimate question: What do all those methods cost you to get a customer in the door?
That’s right—we’re talking about customer acquisition costs.
It’s a metric every business owner should know by heart, every marketer should base their decisions on, and every customer experience specialist should work to improve.
Deep dive into customer acquisition cost, how to calculate it, why it matters—and tips to help you reduce it.
What is customer acquisition cost?
Customer acquisition cost, or CAC, measures how much money it takes to bring new customers to your virtual door.
It takes all the money you’ve spent to make the sale—from marketing costs to sales—and divides it by the number of customers you brought in.
There are countless formulas that dive into extremely granular and complex details to get exact numbers for marketing, sales, and operations costs.
But here is a simple customer acquisition cost formula:
The customer acquisition cost formula
$$ spent on sales and marketing / # of new customers = Customer acquisition costs
It’s easy to look at your paid advertising and think that’s all you’re spending to acquire customers—but that’s a mistake.
You need to assess many costs to get an accurate picture of your CAC.
Here are some often forgotten expenses to include:
- Paid advertising
- Sales staff salaries
- Marketing staff salaries
- Marketing vendors
- Sales and marketing technology
One last tip for when you’re calculating your CAC: Be sure to pick a meaningful time period to assess, either monthly, quarterly, yearly, or lifetime.
If you have a three-month sales cycle, a one-month view of your CAC won’t give you accurate information.
Why does customer acquisition cost matter?
If you’ve ever seen an episode of Shark Tank, you’ve heard hopeful entrepreneurs and even the sharks mention CAC.
Hopefuls often boast high sales numbers only to be cut off at the knees when they admit their customer acquisition (and consequently their business expenses) costs are through the roof.
Why is it such a big deal to the sharks? (And why should it matter to you?)
Because you won’t last long if your CAC is higher than your revenue.
Some business owners pump money into sales and marketing in hopes that it’ll give their business a boost when they’re just getting started.
It’s a sound idea, but you need an exit strategy—a point when your business is generating enough revenue through other means that you can scale back and balance out your customer acquisition costs.
Think of a high CAC as pushing a snowball down a hill.
You need to give it a push to start, but eventually, it continues rolling and growing on its own.
You should get to a point where it takes less capital to get customers in the virtual door and keep them there. That’s the foundation of a sustainable business.
Never look at customer acquisition in a silo.
Your CAC is an important number, but it doesn’t tell the whole story.
Like many other KPIs in customer service, you can’t rely solely on the number in front of you.
There are two additional and vital metrics you should keep in mind when looking at your CAC:
- Customer lifetime value (CLV): You can almost forgive a high customer acquisition cost when you have a high CLV. How long do your customers stick around? How much do they spend over a “lifetime”? Businesses can afford to pay a little more money to get customers in the door if they have a higher lifetime value.
- Customer churn/customer attrition rate (CAR): Customer churn or customer attrition rate measures how many customers you lose over a given period of time. It’s essentially the opposite of retention. And it’s just as important as your CAC. If you spend all of your money getting customers in the door only to have them shop elsewhere after a couple of months, you’re not in good shape.
Putting these metrics together will tell you if your marketing and sales efforts are working and how your customer service is measuring up.
Then you can figure out when something isn’t working, what it is, and how to fix it.
Why business messaging?
Business messaging is an underutilized tool—and customers are practically begging businesses to use it more often.
That’s not to say business messaging isn’t growing. Juniper Research has found that global mobile business messaging traffic will increase by 10% in 2020 to 2.7 trillion, up from 2.5 trillion in 2019.
Need some ideas for reducing customer acquisition costs? Look no further than business messaging.
Messaging has the potential to be a key pillar in your CAC reduction strategy.
There are ample opportunities to harness messaging, from SMS/text messaging to Facebook Messenger to web chat, to lower your customer acquisition cost.
7 ways to reduce customer acquisition costs with messaging.
Many parts of your business impact acquisition costs, and you can make changes to everything from your advertising campaigns to your products and services to help reduce them.
Here are 7 ways you can use messaging to lower your customer acquisition cost:
1. Get to know your customers better.
The quickest way to a high CAC is to spend tons of money on advertising with no strategy. It’s like a “spray and pray” approach. You’re paying big advertising dollars and talking to many people with a general message.
Sure, sometimes it works—but it fails more often than it succeeds.
Instead, get to know your customers better so you can spend more time talking to the right people with the right message.
With better insights into your customers, you can spend less money on general marketing messages to lower your CAC.
2. Shorten the sales cycle with SMS/text messages.
If your sales team works more closely with your customers, the sales cycle quickly gets bogged down with emails, from pitches to meeting invites. It’s easy for them to get lost and go unnoticed.
However, SMS/text messaging is a great way to keep conversations flowing throughout the sales process.
Text messages have a nearly 100% open rate—compared to email, customers are much more likely to read and respond. It’s also more casual than email, and it helps facilitate easy conversations.
Your sales team can get to know customers better before launching into the sales pitch.
Bonus tip: You can even automate part of the lead process to start the conversation and collect qualifying information. That way, you can ensure your sales team only spends their time on hot leads that are more likely to lead to a sale.
3. Be more available to customers at peak decision times.
How easy is it to chat with your customer service?
If website visitors have to go searching through your website or make a phone call to ask a simple customer service question, you’re missing out on sales (and effectively driving your customer acquisition cost through the roof).
Instead, increase your conversion rate by always having your customer service team a click away.
Not only should you have web chat available on your site, but also time it to ask customers questions at peak decision points.
More than two-thirds of customers want an organization to reach out and engage with proactive customer notifications, according to Microsoft’s Global State of Customer Service report.
Send a welcome message when customers visit your site, offer product suggestions as they start to add things to their cart, or pop up with FAQs if they land on your help page.
You’re more likely to capture customers, lower your conversion rates, and improve your customer acquisition cost.
4. Lean into marketing automation.
Automation is a great way to continue your marketing efforts at a much lower cost systematically.
You can leverage AI-powered bots to assist your team at various points of the sales process.
Your sales team can use customer acquisition chatbots to engage leads early and even qualify them before reaching a salesperson.
Leaning into automation early will help lower your costs overall and improve your CAC.
5. Improve your omnichannel strategy.
The move to online sales has increased the need for an omnichannel strategy, which can sometimes stretch your marketing team thin.
The majority of customers continue to use 3 to 5 channels to get their issues resolved, according to Microsoft, so it’s vital that you’re set up to serve them across channels.
Being ready to help builds customer loyalty.
Plus, you’ll have more opportunities to upsell and cross-sell with messaging, improving your average order value and CLV.
A conversational AI platform that works across channels will also ensure customers can always pick up a conversation where they left off.
6. Use messaging to enhance retargeting advertising.
Retargeting emails can be too reactive. Instead of sending “Oops, looks like you forgot something” emails, try using SMS marketing instead.
Send a text with rich messaging, and delight customers with friendly GIFs, product images, or even appointment schedulers.
You can even send a timely coupon or discount code to encourage the purchase. Engage customers with more friendly conversations instead of irritating them with abandoned cart reminders.
7. Don’t forget about your current customers.
Customer service is often overlooked when it comes to customer acquisition since it focuses on current customers over prospects.
But improving your customer retention is a sound strategy to help you lower your CAC.
Building customer loyalty through customer service will help improve your customer’s lifetime value. They’re more likely to stick around and continue buying when they feel valued.
You can also use existing customers to bring in new ones. Use messaging to collect customer reviews.
Microsoft reported that 89% of customers globally want to be given the opportunity to provide feedback—so make it easy for them to share it.
Send surveys via SMS/text or send CSAT surveys after customer service interactions.
Turning your customers into advocates will improve your social clout, and it’ll require less advertising spend to get customers in the door.
Message your way to a lower CAC.
Customer acquisition costs touch every part of your business. Without a sound strategy to keep costs low, it’s easy for them to spiral out of control.
Business messaging is a great way to automate processes, connect with customers, and improve sales—all without exponentially increasing your overhead.
Reach out to our experts for more messaging strategies.