In marketing, there are many different terms that we all need to be familiar with. One of those is “cost of acquisition” or CAC, which in simple terms is “how much does it cost me to get a new customer?”
The economics and recommendation of a “good CAC” varies based on type of business and offering (price point, length, etc) so I won’t be covering that today, but I will be talking about how to lower your CAC if it is too high.
Reality is, there are a ton of marketing channels and platforms and tools that all claim to help you grow your business. But depending on your business and needed cost of acquisition to remain viable, that list can narrow dramatically.
Something we get asked often, and that I hear being discussed in tech and especially software circles, is how to lower your cost of acquisition.
Here are seven ways to lower your cost of acquisition so each customer can be more profitable.
Find cheaper acquisition channels
Often when I speak with companies who are looking to reduce their acquisition costs while still growing, they’ve been heavily dependent on just 1 or 2 channels that are getting more and more expensive as they get saturated.
This usually happens with channels like Google Ads or Facebook Ads, both of which have become more expensive over time (Facebook Ads are still quite affordable, though compared to a few years ago are much more expensive).
When this happens and your margins start to get uncomfortably squeezed, it makes sense to look for channels that are cheaper such as SEO and content marketing. In fact, I tend to see companies that have grown well off of paid acquisition then look to these channels increasingly because they become another growth lever over time that can be massively profitable and allow them to keep investing in ads.
Retargeting through lower cost networks
Some channels have become very expensive, as I just noted above. For example, if you’re a B2B brand then LinkedIn Ads might be great for you because your audience is CMOs and they (or their assistant) hang out on LinkedIn. (This is just an example).
LinkedIn ads happen to very effective for the right companies, but they’re expensive. They might be worth that first click, but not additional clicks.
So instead of retargeting on LinkedIn, maybe you can use Facebook or Google’s Display Network or a similar lower-priced alternative for those additional clicks before they buy.
Improve conversion rates
One way to improve your acquisition cost is to convert more of your visitors to customers, and to do it faster which thus requires less marketing budget on various channels to convert them.
A few ways to improve conversion rates are:
- Better calls to action around the site (in context, top navigations, etc)
- Convert them to a “lead” earlier via a lead magnet or similar so you now have their email and can turn them into a paying customer via low cost channels like email.
- Improve your copy to better speak to your ideal customer and the problems they’re looking to solve.
This is one of the most complete resources I’ve ever found to conversion optimization.
Increase LTV or percentage of returning buyers
Depending on your business model, increasing lifetime value or percentage of returning customers will help CAC matter less. In fact, you’ll probably be able to pay more if you have to in order to acquire a customer because your economics will be better anyways.
If you can increase a customer’s lifetime value (if SaaS or ecommerce) or number of times they buy (ecommerce, also improves LTV) then you’ll be more profitable on each customer, and if you keep your CAC the same as you improve LTV you’ll have more to invest into acquiring new customers.
Limit retargeting frequency
A lot of brands don’t control how many times they’ll show a retargeting ad to someone who has been on the site but not converted.
While it is true that the rule of 7 is important to remember and you need to show them your ad enough times (this is also why many brands rotate ad creatives), it is also true that at some point you’re just wasting money by continuing to advertise to them. We can’t rely on people to dismiss ads as not relevant unfortunately.
By limiting targeting frequency, you’ll pay less over time and thus reduce CAC. You can always show them retargeting ads again if they come to your site again.
Move to lower cost channels for conversion
As mentioned various points above, moving to lower cost channels for conversions and adjusting what a conversion is can dramatically reduce your CAC.
For example, instead of advertising on Facebook could you advertise on Quora and drive them to a lead magnet to capture their email? Quora get a lot of traffic and you’ll get more leads. They may be less qualified and thus more noise, so you’ll need to watch if they actually convert, but it’s a good strategy.
Build your brand
This one isn’t a quick strategy, but it is true that well known brands have lower acquisition costs than unknown brands simply because people trust them more.
Think about it – if you see an ad for AirBNB or an ad for LocalVacationHomes.com, which one are you more likely to click?
Even if you’re not a customer of either, you’ve definitely heard of one (AirBNB) and not the other.
In fact, AirBNB’s brand is so strong that they recently announced they cut marketing spend significantly in 2020 and don’t plan to restart a lot of it.
That is the power of a brand. It’s not free and it’s not cheap, but by becoming the go-to trusted brand in your industry your CAC will look pretty amazing.
Bonus: improve your average transaction size
If you’re an ecommerce or infoproduct brand, improving your transaction size can be a great way of offsetting your CAC. Using a tool like Carthook or ClickFunnels for post-purchase offers can dramatically increase your average transaction size.
And when you increase your transaction size without increasing CAC, your margins get better and so does your business.
Bonus: Offset CAC with an upfront paid offer
One of the best ways to offset your acquisition costs is to offer an easy upfront no-brainer offer that your prospect buys first. If done right, you can even essentially get paid to get them as a customer because you’ve solved their initial pain point so acutely that they pay you and then sign up for your product.
This can also be implemented as an onboarding or setup fee, or a concierge service (for onboarding and setup 😉) for their initial setup so that you can recoup costs.
What is CAC?
CAC is the acronym for “cost of acquisition”. Basically, it’s how much you pay to acquire a new customer.
How to calculate CAC
Calculating CAC is fairly straightforward. In short, this is the calculation:
Total cost sales and marketing divided by number of new customers
If you get 100 new customers and spend $5,000 on sales and marketing then your CAC is $50.
CAC is most commonly used in tandem with payback period, which as you may be able to tell is the amount of time it takes for you to make back your acquisition costs and make a customer profitable. The shorter the payback period, the more profitable your business will be and the more you can put back into marketing to continue to grow.
If your CAC is $50 and your MRR from each customer is $29, then it will take 1.72 months (about 7 weeks) to make them profitable assuming they stay for 2 months. This is considered quite good for SaaS, as 3 months is about a target for CAC payback.