When it comes to business development, and customer acquisition, most would agree that retention is easier than build. In fact, some would go as far as to say that it costs 5 time more to acquire a new customer, than to retain them.
And that’s all wonderful if you have a strong loyal customer base. But not all customers stay put. At some stage, and (let’s be honest) almost daily – business thoughts turn to new acquisition – where marketing and sales budgets meet, where customer deliver and supply dominate and where commercial teams take a stronger leading role in your business growth than ever before.
CAC is the cost of convincing a potential customer to buy your product or service. It is an increasingly important metric that is driving operational process, budget and more importantly, investor interest in your business.
It’s a metric that is becoming even more critical to not only measuring your business success, but also to directing any future budget spend efforts. Where awareness of a CAC influences various parts of the business, quite often, it’s the role it plays in the lives of your investors (or potential investors) where it starts to get really critical. Investors use the CAC metric as a way to get an immediate snapshot view of your business performance. They are interested in the nature of your current customer relationships and the propensity for those relationships to deliver long-term yield.
So what are the risks associated with not accurately measuring (and managing) your customer acquisition costs?
The Out of Balance Business Model
Things become messy when a company is spending more to acquire a customer, than what they hope to earn from that customer for the duration of their lifetime with you.
To compute the Lifetime Value of a Customer, LTV, you would look at the Gross Margin that you would expect to make from that customer over the lifetime of your relationship. Gross Margin should take into consideration any support, installation, and servicing costs. It doesn’t take a genius to understand that business model failure comes when CAC (the cost to acquire customers) exceeds LTV (the ability to monetise those customers.)https://www.forentrepreneurs.com/startup-killer/
In reality, the nirvana is exactly the inverted view of this picture – where the lifetime value of a customer exceeds the amount of money you’ve spent to acquire them in the first place. That’s return. And that’s the type of value that your key stakeholders are looking for.
False Entrepreneur Optimism
There’s an old adage that reads that Entrepreneurs are often incurable optimists. And things become particularly problematic if that optimism starts to cloud their vision – small problems can turn into business-threatening issues, and the wheels, all to quickly, start to come off.
A lack of management is dangerous, but a lack of measurement can prove fatal. In fact, the founders of Avondale, a well-known business advisory service, take that a step further and suggest that entrepreneurs should be taking active steps to seek out the facts that contradict your sunny view, and that you should be doing that through talking with your customers regularly, talking with your employees regularly, and looking at your financials.
But to look at your financials means you need to know how to measure them – and that’s where knowing exactly how much your business is spending on it’s potential growth plan becomes paramount to whether you get to see that plan realise, or not.
Customers require a lot less to buy from you
The hard truth is that your customers need you a lot less than they used to. They learn from friends, not salespeople. They trust other customers, not marketers. They’d rather help themselves than call you.https://blog.hubspot.com/news-trends/customer-acquisition-study
Changes in customer habits mean that acquisition models are being forced to adapt. Consumers are becoming more impatient, more demanding, and more independent. They’re expecting responses quicker, and their loyalties are no longer bound only to you. And even when we speak about customer trust, consumers are turning to fellow-consumers, friends, families and third party review apps like Yelp!, TripAdvisor, Glassdoor – buying habits are being driven by influences quite often outside of your immediate control.
So how does that translate into acquisition costs for you?
Acquisition costs are getting more expensive. Marketing trends show that competition is on the rise with Google taking back its own real estate, Social platforms prioritising the way posts and content is being displayed, and more. Organic acquisition costs are increasing, content developer salaries are increasing, data protection is becoming fiercely strict, and because of all of this, the sales and prospective processes are feeling the same pinch.
But there’s a silver lining in all of this.
And this Hubspot blog describes it perfectly:
When you’re growing a business, two numbers matter more than anything else:
- How much it costs to acquire a new customer (or “CAC”)
- That customer’s lifetime value — how much they’ll spend with you over their lifetime (or “LTV”)
If your customers are unhappy, you might be in trouble. But if you’ve invested in their experience, you’re well-poised to grow from their success.Michael Redbord: https://blog.hubspot.com/news-trends/customer-acquisition-study
Ready to review your operational and financial productivity and how that translates into growth strategies?