Know And Minimize Your Customer Acquisition Costs
Know And Minimize Your Customer Acquisition Costs
Customer acquisition cost (CAC) is the measure or effectiveness of your marketing and advertising campaign.
Just looking the words, CAC is the number of dollars spent to add one paying customer.
If $2,000 in marketing expenses generated 10 new customers, the CAC is $200.
If $2,000 in marketing expenses generated 20 new customers, the CAC is $100.
The next step is to calculate what revenues were generated from the 10 or 20 new customers.
If $50,000 in new revenue was generated by spending $2,000, the figure would be 25. Or, for every $1 marketing dollar spent, the business made $25.00. So, there are two ways of tracking marketing investments.
There are several points to make about CAC.
1. Every business has choices and has decisions to make about their marketing and advertising strategies. There are so many choices to promote your business.
I provided a link to a website which lists the costs of advertising broken down by medium. Choices include: direct mail, telemarketing, SEO, PPC, email marketing, and web content development. The cost components are: setup costs, cost of create media, and costs to continue the advertising campaign.
2. Business owners’ budgets and revenue needs (or expectations) determine which advertising medium is chosen. Again, this broadcast and blog article are produced for business owners who easily have monthly overheads of $30,000 or more, plus the business owners’ incomes.
I included the statement about budget and revenue because, as a former corporate manager responsible for a $700,000 monthly budget and an ongoing and increasing revenue goal of $3M per month, I am sensitive to the revenue and expense concerns traditional business owners have.
Although, I didn’t pay the $700K monthly expense out of my pocket, nor did I receive the $3M in my bank account, I felt pressure from senior management when expenses rose above $700K or revenue dropped below $3M because existing accounts were lost or new accounts were not added.
Marketing investment decisions made by business owners are always risky. The key is to make the best decision having the least amount of risk and the greatest potential for making more money.
What is the risk? The risk is spending money and not receiving the expected CAC. What is CAC again? CAC is the number of dollars spent to add one paying customer.
Marketing by Percentages
“The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin — after all expenses — is in the 10 percent to 12 percent range.
Some marketing experts advise that start-up and small businesses usually allocate between 2 and 3 percent of revenue for marketing and advertising, and up to 20 percent if you’re in a competitive industry.
Still other marketing experts counsel a range between 1 percent and 10 percent, and even more depending on how long you’ve been in business, competitive activity and what you can afford. It’s apparent from these differing opinions that the percentage of gross revenue for marketing and advertising depends mainly on whom you ask. They’re probably all correct if you know their assumptions.”
Another marketing investment factor used with CAC is ROI.
CAC and ROI are closely related. ROI is the relationship between Revenue and Expenses. The expense calculation includes all expenses. To avoid confusion, I will keep the focus on CAC. CPAs regularly provide ROI calculations taken from Profit and Loss statements to their business owner clients.
Next, let’s look at the industries 321 supports and how marketing/advertising decisions affect CAC each one. 321 supports real estate and mortgage brokers, attorneys, dentists, cosmetic surgeons, CPAs and financial services specialists.
I will quickly discuss real estate and mortgages since I have over 10 years of industry experience.
Among all agents, the real estate industry is a high expense industry relative to the number of agents who close escrows on a regular basis. Meaning, many agents spend lots of money but only 15% of agents make enough money to be considered successful.
Agents have several marketing options: mailers, local newspaper ads, high end industry magazines, and lead generation subscriptions.
Real estate sales has a built-in factor driving the CAC to undesirable levels. In most metropolitan areas, for every escrow closed in the month, 5 to 7 agents did not close during that month.
You can see how agents can pay for mailers, print ads or lead subscription services and not close escrows for months.
I know an agent in California’s Sacramento Valley who paid $3,000 to a lead generation company over a 6-month period and did not close a deal until the sixth month. The commission check was $8,000. The CAC would be $3,000 for the one closed escrow. Even if two escrows were closed in six months, the cost would still be $1,500.
I know another agent in Miami who pays $2,000 per month in lead subscription expenses and the commission checks average about $18,000 every 90 days. The CAC is this example, over a six-month period, is 6 x $2,000 or $12,000 for two escrows…or $6,000 per client. But the agent made $36,000 over the six-month period or $6,000 per month. In terms of ROI, the ROI is ($36,000 – $12,000)/$12,000 or 200%.
And a true ROI calculation should include ALL expenses associated with selling homes such as NAR, local association and MLS dues in addition to gas, website, signs, broker fees, etc.
For legal, dental, and cosmetic surgery practitioners, ROI must be considered along with CAC. Often the CAC is the least concern these specialists have. It’s an enigma or cache 22.
“I need to spend money to make money, but I don’t want to spend money if I’m not going to make money.”
If $5,000 is spent in month 1, but little to no revenue is generated, the $5,000 could have been used towards overhead expenses…or put towards the owner’s salary.
If the same poor revenue results are the same in month 2, now the business owner is down $10,000. To recover loss revenue in months 3, 4 and beyond will require adding an unlikely high number of new customers to make up for months 1 and 2.
Looking at past marketing and advertising decisions and the results or lack of results, what can a business do to minimize the risks?
Or, looking at the glass half-full, what is the action plan to make profitable CAC marketing investment choices?
There are two sides of the coin in looking at CAC.
The first side is the coin is to evaluate how to minimize marketing costs. The other side is how many customers can a business owner add for the least possible marketing costs?
If business owners can both minimize marketing costs and simultaneously add more customers, wouldn’t this be the ideal situation?
What if a business owner could clearly see exactly where marketing dollars are going AND be closer to customers making yes, no or not now decisions? I like to use the phrase “full business development transparency”.
In evaluating sales performance, productivity and profitability, it’s best if there are the fewest number of intermediaries between the business owner (or salesperson) and the potential customer.
The business owner will always work in his or her best interests because he or she bears the most financial risk. Everyone else in the hierarchy below the business owner, by default, has less at stake.
The best business development program should provide a logical, predictable and repeatable process to add the most customers for the fewest marketing dollars.
Would reducing costs and adding new customers in the same month create a multiplying positive effect to business performance, productivity and profitability?
You bet it would.
This is where 321 comes in. Our company can reduce Customer Acquisition Costs and provide businesses with an approximate number of qualified prospects. The business owner’s final step is to see if there is a match between the company’s services and prospect’s needs.
If your company is interesting in learning more, the next step is make an appointment with 321 to discuss your current situation. Let’s find out what your current CAC numbers are.
321 is a consulting firm offering business development, website, digital marketing and software application services to small business owners in the USA and Canada.