In the eCommerce industry, efficiency matters. It's a truism, but many people forget about it, burning money on ineffective actions. In today's article we focus on an important and very often overlooked in performance indicator - CAC. What is Customer Acquisition Cost, how to measure it and, most importantly, how to reduce it without losing sight of the most important thing - conversions?
Customer Acquisition Cost translates literally. How to understand this term? CAC defines the amount that a company must spend to convince customers to a service or product. Thus, through this indicator we see the profitability of an investment, the relationship between it and the return. The control of this measure is equally important with a tight budget, as well as with large sums allocated to campaigns.
How to calculate Customer Acquisition Cost?
Campaigns conducted in social media or search engines are measured in terms of many parameters, most often showing the cost per click, display or conversion. This last indicator is key in the context of calculating the cost of acquiring a customer. The basic formula for CAC is as follows:
Customer acquisition cost = total cost of marketing activities / number of new customers
Measuring CAC is trivial - just divide the total amount from a given campaign period by the number of new customers acquired during that time. However, it is worth remembering that the notion of investment includes not only funds allocated for promotion, content, events and SEO optimization, but also expenses incurred for software, all paid tools necessary for marketing activities, as well as salaries for employees. Another important issue is to specify the duration of marketing activities. It is not uncommon for the effects of a sales campaign to produce results only after the campaign has ended. Therefore, CAC should not be calculated on a monthly basis, but at least on a quarterly basis.
A good practice to draw more detailed conclusions is to perform Customer Acquisition Cost calculations for each channel separately. This will give us information about the effectiveness of channels, which one delivers the greatest number of customers at the lowest cost.
13 ways to lower the cost of customer acquisition
We already know what the customer acquisition cost is and how to calculate it. The question that remains is what we can do to keep this cost as low as possible. Here are 13 effective ways to lower CAC:
- pay for advertising - the higher conversion you expect, the more money you have to spend on advertising. Only paid activities will allow you to specify your target group. Once you reach the expected CAC level, then you can reduce your advertising spend proportionally;
- don't invest in ineffective campaigns - simply abandon those activities that, once optimized, still don't produce results. This is an important lesson for your team going forward;
- clarify the target group - narrow it down as much as possible, taking into account those characteristics of the target group that define the profile of an ideal customer;
- remove friction points - eliminate all features of your site that drive customers away. Among the most common friction points, we can mention slow page loading and poorly performing customer service;
- take care of the overall user experience - attracting customers to your store is just the beginning. Use analytical tools to monitor which areas of your site do not deliver the expected results and optimize them;
- Update keywords - in your search engine campaigns, leave only those that are most relevant and bring the best results (yield conversions) for your eCommerce;
- Improve your SEO strategy - often eCommerce SEO efforts live their lives - no one sets their goal, no one digs into their success. Well-optimized SEO and positioning for key phrases will significantly reduce CAC;/li>
- invest in remarketing - remind yourself of recipients who have already encountered your offer. Returning customers is often much cheaper;
- automate some of the activities - newsletters, autoresponders, chatbots - marketing automation will bring big savings, for example in your staff's working time;
- allow feedback sharing - by allowing reviews of your products and services, you gain authenticity and increase customer trust in your eCommerce;
- test - check various versions of graphic design and ad copy. Optimize them, analyze and choose those that bring the best results. A/B testing of entire landing pages is also a good practice;
- build an affiliate network - take care of this channel of marketing activities. Use the opportunities of your partners to attract new customers;
- take care of quality content - by building high engagement you will make the website visitor more likely to become a customer. With valuable, relevant content you not only educate and build trust to the brand, but also convince to purchase.
Acquire, but also maintain
Acquiring a new customer costs companies up to 7 times more than retaining an existing one. There is a lot of truth in the words of Neil Patel, an expert recognized by Forbes as one of the top 10 marketers. Why is the cost of customer acquisition so high?
Guiding a new person through the entire sales funnel is a long process, and therefore risky. At each stage a potential customer may lose trust and withdraw, so we have to prepare a perfectly working campaign on many channels: social media, search engine, but also work through events, content marketing, etc. Campaigns, on the other hand, require specific human and time resources. They also need materials - texts, graphics, videos. All of this adds up to quite a substantial investment. Therefore, apart from activities aimed at gaining new clients, it is equally important to take care of the ones we already have. How? For example, through loyalty and education programs, or by running groups for customers on social networking sites, where you preview products or offer special discounts. Improving retention rates must be an ongoing activity for your eCommerce. Why? Because it pays off! Regular customers spend much more on products and services than newly acquired ones.
Expensive, but of high quality!
Remember, that a high customer acquisition cost is not a bad thing for your eCommerce business, as long as it brings a proportionately high return on investment. When measuring CAC, don't be guided only by the number of customers, but also by their quality. Hypothetically, it may happen that sales are ultimately better affected by a few new customers acquired through a Google Ads campaign than by a few hundred new people from Facebook Ads. So take into account the image and financial value of your customers - it is not always worth making decisions based only on a simple formula for calculating Customer Acquisition Costs.
At the end of the day, all that matters is that in the long run, the cost of acquiring a VALUABLE customer is less than the revenue it will bring us.
