Business Killer: Ignore those Shifting Customer Acquisition Costs
How you get and keep your customers matters.
We have to get customers or we are out of business, but choosing the wrong Customer Acquisition Method will bankrupt your business.
Why should I care as long as I get more customers?
Sometimes the cost to acquire a new customer will not be worth it. Read this quick article if you:
Are frustrated by your profit margins?
Are wondering how much a new customer is worth to your business?
Don’t understand why your sales approach may not be working
Let’s get started at the beginning, many businesses love their method of marketing and selling. In fact, think about how seldom someone will answer your question of “What do does your do?” without them also mentioning their marketing channel.
So “What does your business do?”:
We sell an App that organizes a sales teams prospects and customers for improved sales and conversions.
We sell athletic fashions for women online using social media advertising through TikTok and Instagram.
We sell toys and science discovery items for children through our local store.
We sell healthy living products through a network of direct sellers.
We sell cars through our local dealership facilities.
We sell our skin care through specialty stores by paying for excellent space on their shelves.
Every company has a way that they sell to people—their customers (note the highlighted elements above).
You can mix and match many of the items sold above, and how they are sold.
But understanding the cost impact of your sales channel decisions is critical to your success.
What is my Customer Acquisition Cost (CAC)?
The amount of money it costs you to sell your products divided by New Customer is your CAC.
This CAC number varies a great deal between business types and while it is a simple calculation, many people just plain get it wrong.
Improve Your Customer Acquisition Investment Today.
Download your 10-page free workbook.
Selling Cost: Add all of your marketing and selling related costs from last quarter including wages, marketing fees, advertising, outsourced costs and related costs (commissions, etc.)
Number of Newly Acquired Customers: Add up the total number of new customers from last quarter
Divide your Selling Cost by the Total Number or New Customers
Here’s the Fomula:
Selling Costs / New Customer Count = Your Customer Acquisition Cost
Do this Now…
It’s worth 10 minutes of your time!
Quickly Calculate your Customer Acquisition Costs
Get your CAC in 3 Steps:
Step 1 - Calculate Your Selling Cost: Add all of your marketing and selling related costs from last month
Step 2 - Number of Newly Acquired Customers: Add up the total number of new customers from last quarter
Step 3 - Divide your Selling Cost by the Total Number or New Customers
Here’s the Formula:
Selling Costs ÷ New Customer Count = Your Customer Acquisition Cost here
Know Your LTV:CAC Ratio
There are industry numbers on average inorganic CAC costs by industry.
Automotive - $1,240/customer
B2B SaaS -$660/customer
eCommerce - $85/customer
Manufacturing - $780/customer
Point of Sale - $841/customer
But the better measure is to also calculate your LTV (Customer Lifetime Value) and compare it to your CAC.
LTV is simply the gross margin on your average total customer spend over their time purchasing with your company. (LTV = Avg Sale * # of Purchases * Gross Margin)
For instance, if I’m selling a nutrition supplement and my total average customer spends $120 three times on average, the average customer will spend $360. Then multiply your Gross Margin number against that.
If your Gross Margin was 65% then the LTV would equal $234.
Next test your Ratio of LTV:CAC and you are aiming for something at 3:1 or better.
Note that if your ratio is 1:1 you are losing money as the CAC does not take into account overall business overhead.
Even at 2:1 you may still be losing money in your business.
Additionally, if you are in the 5:1 or higher range, spend more now and build as fast as you can afford to do. Why? Because the costs increase over time and if you have a 5:1 or better, your business will become a competitors target as they seek growth as well.
Beware: Unique Commission Based Business Risk!
I love commissions based businesses. They have a clear way to make sure the sales costs scale with revenues.
There is a challenge here though and that it to ensure you are accounting for them in your CAC analysis.
If you are running a commissions based sales plan (whether its a network marketing company or an insurance product company…or anywhere in-between) you need to take special precautions to ensure your values are right…or you will find yourself with a 5x to 7x markup and still struggling to pay the bills.
One big challenge is a commission plan that doesn’t flex as customer acquisition rises and falls.
Why is this a risk? Because if your sellers are earning well from your existing customers and don’t have enough incentive to bring in new customers, you will find your CAC soaring as your selling expenses are all going to existing customers in a steady state, while your new customers per period shrinks.
Let’s look at a quick example:
Company A, is doing $3,000,000 in revenue a month, with total sales and marketing costs of $1,200,000 (40%), and an average monthly customer spend of $125 will have generated 24,000 orders in the month. If 30% of their revenue comes from new people, that is 7,200 new customers a month.
Company A CAC = $167/New Customer
Company B, has all the same numbers, but because the commissioned salesforce is no longer prospecting well because the rewards for brining in new customers are misaligned, bad things happen. Say only 10% of revenue is coming from new persons each month. That would mean the $1.2 million in sales and marketing only generated 2,400 new customers in a month.
Company B CAC = $500/New Customer
Try This:
If you are a commission only or have a heavy commissions compensation plan always reward more new customers—always.
Finally, ask yourself….
“What steps can I take to improve my ratios and my profitability?”
Taking a different approach to your business can make a world of difference to your success.
