Understanding and Leveraging Your Customer Acquisition Costs
So what is Customer Acquisition Cost? In the most basic terms, it is the cost of convincing your customer to purchase your product or service.
This metric has become increasingly important to marketers, business owners, and investors. Today, companies that sell their good or service online can execute highly-targeted campaigns to track consumers through their buying journey - from consideration to conversion.
How to Track Customer Acquisition Costs
To track your customer acquisition costs gather your Advertising costs, costs of the employee salaries, costs of any outside creative, costs of technology related to marketing, and costs of publishing, production or equipment. Then you want to divide the total costs spent on acquiring more customers and divide it by the number of customers you acquired in that year.
To illustrate -
Lola's Lipsticks are an e-commerce company that sells high-end lipsticks, lip glosses and lip treatments. Last year Lola spent $100,000 to acquire 10,000 NEW orders. It appears that Lola's Customer Acquisition Costs were $10.00 - which doesn't really mean a lot.
Let's add some more context to this.... If the average order placed by a customer is $20.00 and Lola has a markup of 100% for all products that means Lola makes $10.00 per sale and doesn't generate any additional dollars to pay for any expenses outside acquiring customers. This is not great.... Lola needs to find a way to decrease her customer acquisition costs or she will be in the dog house.
Now let's look at Tucker's Tequila. Tucker's Tequila is a premier subscription-based Tequila company where customers can order high-end tequila directly from Mexico and get it delivered directly to their doorstep monthly. last year, Tucker's Tequila spent $1,000,000 to acquire 100,000 new customers, so it looks like Tucker's Tequila has a customer acquisition cost of $10.00 just like Lola. However, remember that Tucker's Tequila is a monthly subscription service and requires a minimum year-long subscription that costs the customers $250.00 per year while the cost of producing a years worth of tequila costs Tucker $100.00. That means for every one of Tucker's customers $140 goes to covering costs outside of generating new customers.
You can also run this algorithm to find out the customer acquisition cost by platform or campaign. If you have the right measurement plans in place you can compare your pay-per-click, website, social channels and more to determine which campaign or platform is performing best for you.
We can all hope that our customer acquisition costs are like Tucker's Tequila. Realistically, advertising campaigns can always be more effective and our customer loyalty programs and processes can always improve.
Tips to improve your Customer Acquisition Costs
Improve your conversion metrics on your site - you can set up goals on Google Analytics to see where customers may be falling through the holes, you can review your site speed, how you are optimized for mobile, if you have chat services or any other factors that improve site functionality.
Better leverage or implement Customer Relationship Management - This can include CRM software, detailed sales processes to nurture the customer through their journey, loyalty programs, or content that is relevant to your buyer before, during and after the sale.
Do you have more questions about this topic? Email us at mhbreister@gmail.com.
