A new business can only survive in its niche market if it has quality users. But acquiring those customers takes money, resources, and time.
Thus, customer acquisition cost (CAC) is the most important metric for startups to gauge in their early stages. To calculate your CAC, divide your sales and marketing costs (including overhead expenses) for a given period by the number of customers you acquired during that same period.
A high CAC implies you’re spending too much on your customers, which could kill your business. To help your startup lower its CAC, we’ve put together our best tips and tricks for gaining customers on the cheap.
Know your ideal customers
Don’t waste valuable time, resources, and energy on visitors who are unlikely to buy from you. Create personas or buyer profiles to help you discover which customers are most inclined to purchase your products and remain engaged and loyal. Then target those customers who match your ideal customer profile.
You’ll also want to track the lifetime value (LTV) of your customers. Simply put, LTV is an estimate of how much you expect to gain from a customer during his or her association with your company.
To find out your customers’ LTV, first, determine how long a customer is likely to stay with you. (But don’t confuse inactive members with dead accounts. Set time limits on when to label customers inactive or dormant.)
Second, multiply the revenue you expect to generate through that customer to get the LTV. You can now subtract your customer’s CAC from his or her LTV. If the customer’s CAC is higher than his or her LTV, your business will lose money and your business is likely to fail.
Target customers whose LTV is at least three times their CAC and try to recover their CAC within 12 months (take the hint from EBay).
Improve your on-site conversion rate
Spending money to acquire traffic is only half the job. The sales volume of any business depends on how much of its traffic is converted into paying customers. As a rule of thumb, the higher the conversion rate, the lower the CAC.
Just as real estate is all about location, conversion optimization is all about A/B testing. Set up goals and perform A/B split testing with your on-site systems to reduce abandonment rates. Optimizely is a great tool to test variables on your web pages.
You’ll also want to optimize your site’s CTAs, such as signups and landing pages; improve your site’s speed; invest in remarketing and email marketing; and put money into mobile optimization and other factors that will enhance your site’s overall performance.
Invest in customer retention
Obsessing over acquiring new customers can distract you from the revenue source you already have–your present customer base. Customer retention is as valuable as, if not more valuable than, customer acquisition. Neglected customers will eventually become frustrated and leave.
Seventy percent of companies say it’s cheaper to retain customers than acquire new ones. Neil Patel, the co-founder of analytics companies like KISSmetrics, Crazy Egg, and Quick Sprout, says, “It costs six to seven times more to acquire a new customer than it does to keep a current client. In addition, it costs me four times more to close a deal with new customers than it does to upsell a current one.”
Focus on keeping your existing users satisfied. Make sure your marketing plan and budget expenditures allocate adequate funds for customer support, feedback surveys, and social media platforms.
Implement a customer relationship management (CRM) system. Successful companies that have repeat buyers implement some form of CRM, such as a sales tracking system, marketing automation for email marketing, social media marketing, blogs, and loyalty programs that can capture customer loyalty.
Reduce customer attrition
Customer churn, or customer attrition refers to customers ceasing to have a relationship with a company. If gaining customers is a hefty business, losing them is fatal in monetary terms. Dissatisfied customers can do serious damage to your brand’s reputation.
Bad reviews from displeased customers can make new customers less inclined to trust your business. Negative brand value, in turn, can increase the marketing expenditures required to convert customers to overcome their biases.
Offering products and services that your customers value, along with exciting offers, can reduce attrition from your business. For example, if you’re an e-commerce startup, always make sure to retarget users who’ve abandoned their shopping carts.
This is the most important segment for retargeting. People who abandon their shopping cart previously showed strong interest in making a purchase on your website. If you retarget them with the right offer, they’ll most likely become buyers. Thus, a happy customer is a happy promoter and a money saver, too.
Referrals, viral coefficient, and social media
Success in business comes through word of mouth. It’s no surprise then that referral marketing fuels the growth of any company. Startups usually enlist friends as beta users to test their products and if their products please their friends, they’ll refer them to their friends and so on.
Referrals can cut down your CAC by 50 percent. For example, Uber, the $50 billion taxi marketplace, attracted its early users through social media campaigns and publicity stunts such as offering free rides for referrals. Its founder, Travis Kalanick, says that 95 percent of all their riders first heard about Uber from other Uber riders.
Your business’ organic growth lies in its viral coefficient (the average number of invitations sent by each existing user times the conversion rate of invitations to new users). A positive viral coefficient will automatically lower your CAC.
Improve your viral coefficient by building incentives into your products. Groupon is a prime example. Groupon offered its first deal, half-price pizza, at a restaurant located on the first floor of its headquarters in Chicago.
Another way to make your product viral and acquire low-cost customers through referrals is by using social media. Zynga is a perfect example. It used social pushes like share buttons, a newsfeed, user streams, email invitations and promotions on platforms like Facebook and Twitter to generate a quality user base at a very low cost.