You’ve probably come across the term customer acquisition cost, but, what is it? That’s a good question and here’s another. How much do you pay for your customers? And, after you have paid your customer acquisition cost, on average, how much profit do you eventually make from each customer?
I’ll answer both questions later in this post.
Let’s Start With Your Marketing
If you mention marketing to the average business owner they think mainly of advertising. But, there are far more cost-efficient and much easier ways to get more profit than simply buying a new customer after a new customer.
Let me explain.
How Can You Lower Your Customer Acquisition Cost?
There are four fundamental principles to follow which affect your customer acquisition cost. And, as a result, affect your ultimate profit.
- Effective targeted marketing (lead generation)
- Work on improving your conversion rates. (at least measure them)
- Increase the average transaction value of each sale.
- Proactively encourage repeat sales from existing customers. (Afterall they are paid for!)
[See The Ultimate Guide To Customer Lifecycle Marketing to learn more about a holistic approach to your marketing.]
But first, we need to understand profitable businesses focus on a simple concept. That’s long-term customers, not one time buyers. But, loyal clients who will come back time after time and refer you to friends, family and colleagues.
So, the first mind transformation you need to make (and with that of your team). Is to realise that your goal is not to sell your products or services. But to attract and buy profitable long-term loyal customers.
This mind-shift, fundamentally changes three things, the way you:
- Approach your marketing, of which customer service is just one aspect but vital.
- Turn marketing from an expense into an investment and expect a return on this investment as you would any other investment (your ROI).
- Accept and realise your customer lifetime value.
Let me explain by example.
Understanding Your Customer Acquisition Cost
When you buy a new customer with any form of advertising or marketing, it costs you. That’s time, money or lots of each. Either way it costs you! You have invested money and effort. So, expect a return on this effort.
A simple example, if you advertised for say £2,000 and got 100 inbound calls and these yield 20 sales. Then each customer has cost you £100. That £100 is your customer acquisition cost (or cost per transaction). Mostly it’s how much it requires you to buy a new customer.
So, taking that one step further, you got 100 people who called in or, 100 new leads. Therefore your ‘cost per lead’ was (£2,000/100) £20. If you don’t already know these numbers, it makes sense to go and work them out for your business.
Incidentally, if you get a lot of business by word of mouth or passing trade, you count them as well which is excellent by the way because these lead generation strategies have a massive impact on lowering your overall customer acquisition cost.
Let’s follow this example again and assume your business is a restaurant. We can further accept each person coming in spent £100 on dinner. How much money did you make from each customer? That’s right; you lost money. It cost you £100 to get them there. £30 for food and drinks to serve them. £30 for staff and £10 for overheads. So in reality, £170 out for £100 in return. In other words, all 20 of these new customers were on average, a loss.
How much do you pay for your customers?
So, there are four ways to reduce customer acquisition cost and turn them into a profitable customer right upfront.
- Work on writing better advertisements.
- Create better headlines.
- Create better (more compelling) offers.
- Improve your targeting by making sure you only advertise in media that reaches your target market.
From there, you should be able to get a much better response. With many of my clients, we’ve doubled and tripled advertising responses with just a few simple changes.
Let’s look at the numbers in your restaurant again. This time you have also doubled the responses from your marketing. And, you can quickly, with some focusing on achieving this.
Now you get 200 callers, and your customer acquisition cost goes down to just £10 each. That’s a great start and assuming the other numbers stays the same. You are down to only £50 cost per sale and thus £120 out for £100 in return. There is still more work to do, but you are improving customer acquisition cost. Do you understand the concept?
Understanding Your Conversion Rate (CR)
Next, your task is to work on getting more of the callers to come in and buy. This number is your conversion rate. And improving this is often as simple as measuring it and as complex as creating scripts for your salespeople or receptionists to follow.
So, back to your restaurant what if, instead of 1 in every 5 (20 out of 100) coming in you get two from five and make sure your marketing and advertising pound spent goes further.
You are now getting 200 callers, and instead of just 1 in 5, you get two people to come in and buy. That means you are up to 80 people booking in and buying from you. Your customer acquisition cost or, cost per sale is now down massively. Your £2,000 advert now gets you, 80 buyers at just £25 each.
So when you do the maths, your marketing is starting to make you a profit on every new customer. That’s just £95 out for £100 in return. You have passed your break-even. You have paid for your customer and made a profit, great work.
Understanding Transaction Value
Next, you need to get your customers spending more every time they buy from you. Instead of £100 each time they visit your restaurant. How can you work on raising each transaction value well, by suggesting other items, e.g. a better wine list, extra side dishes, sauces, etc.? All these ideas, you can now sit down and work out. What else can your customers buy?
Think of it as one of our clients; A pharmacist who offered every single person who bought from him a bag of sugar-free sweets. Previously he only sold these to people with diabetes. Without ever considering they are perfect for kids or people who are on a diet. He ended up selling hundreds of packs a week, just by asking if his customers wanted to buy them.
I am, sure you have been to McDonald’s? Well if you haven’t then, pop in – they train their staff to be masters of this tactic, the up-sell. Ask for a burger, and they always ask ‘do you want fries with that?’ or ‘would you like to go large’? I call these magic questions. What are similar magic questions to use in your business?
[See the post, 3 Strategies To Grow Your Small Business for more on tips on improving your essential numbers.]
Consider The Lifetime Value of a Customer
Finally, and most importantly, you need to get customers back. Collect their details. Send them a monthly newsletter, special offers, even a simple thank-you card and invite them back as often as you can.
In your restaurant example earlier, you probably thought that the customer acquisition cost was terrible, and you would never run that campaign again?
What if that person or group of people had such a fantastic meal. Experienced excellent customer service, that they came back many more times and not only that. They told all their friends and family that, they too must try your restaurant.
What would that do to your customer acquisition cost? (Think about it, isn’t this what happens in reality?) No matter what you do, remember you are buying customers.
There is a customer acquisition cost. So, how much do you pay for your customers?
In our current economy, it’s getting more expensive every day. So once you have got them, you got to keep them and for as long as possible; stop chasing market share (unless you are a high volume producer) and start hunting for wallet share. Think about customer lifetime value.
Exceptional customer service is essential to lowering your customer acquisition cost. Most of us vote with our feet when not treated right. [See this post: ‘Why Customer Stop Buying AND How to Make Sure it Doesn’t Happen to You‘.]
This concept also applies to your follow up marketing. Keep in touch with your customer and give them reasons to buy again or refer you to their contacts.