The Real Cost of Customer Acquisition in Digital Marketing
In the constant effort to drive more sales, many businesses are so focused on customer acquisition that they forget to consider the real cost of gaining new customers in digital marketing. There is no doubt that customer retention can often be a far more affordable solution, offering a cost-effective way to ensure sales year on year, without the high spend associated with gaining new customers. What is the real cost of customer acquisition, however, and, more importantly, can it drive real value in the long-term?
First, let’s take a look at what this cost means in the grand scheme of things. Customer acquisition cost (CAC) is a metric used by a large number of companies and businesses, from internet agencies all the way to e-commerce stores. Often, this term is used to define digital ad spend and marketing that can be easily tracked and quantified. Originally, it was far harder to track the average costs spend on advertising. Today, thanks to the constant growth of digital, it is easier than ever to track consumers throughout their journey, from the initial campaigns used to gain exposure, all the way through to intensive digital marketing strategies used to convert potential customers into paying customers.
Essentially, CAC is simply a way to track the cost of taking a customer from a browser to a purchasing customer. Although this metric does not have to be the only thing to consider when planning your potential growth, it can help to identify ways to reduce spending. Investors often take CAC into account as well, which is another reason that it may be useful to determine this cost.
How Important is Customer Acquisition Cost?
The first thing to consider is that customer acquisition cost does not have to be the only metric you consider when growing your business. There are many ways to reduce these costs – some of which we share a bit later in this guide. Over and beyond that, it is important to note that customer retention should also be a priority. With that said, investors will often use CAC to determine whether your venture has long-term potential. This metric can be very useful to identify areas in which you can reduce expenses or find new ways to bring in business. CAC is important to determine whether new ventures are feasible, too. Other than investors, marketing strategists will also use CAC to find ways of optimising digital marketing campaigns in a way that reduces costs.
Ultimately, customer acquisition always comes at a price. When starting a new venture, you will need to spend money in order to gain new customers. As your venture grows, these costs may not be as sustainable. Costs could include anything from digital marketing to sales and business development salaries, event marketing and various other costs that come into play.
Another thing to keep in mind is that retention can drive growth, even if your company is focused on bringing in new business. Retention can increase the lifetime value of each customer, through low churn rates and recurring revenue, which in turn helps to affect profit positivity. An interesting study by Bain & Company and Earl Sasser of the Harvard Business School showed that even a 5% increase in customer retention can boost profits by anything from 25-95%. Some of the other ways that retention drives growth include the following:
Current customers are more likely to try new products.
According to Invesp, current customers are 50% more likely to try new products, spending on average 31% more than new customers. This is especially effective for cross-selling and upselling.
Current customers are more likely to listen to what you say compared to new customers.
The same Invesp infographic shows that your odds of selling to current customers are 60-70%, while your chance of selling to brand new customers is just 5-20%.
Current customers are more likely to be unofficial advocates.
Happy customers are far more likely to sing your praises to those in their circles when they are happy with your products. This, in turn, helps to bring in new customers, thanks to the power of peer review.
The biggest risk of keeping your focus on customer acquisition without putting the same or more effort into customer retention is that you lose out on the chance to turn one-time customers into loyal brand followers. That’s not to say that you should totally ignore customer acquisition, however. Ideally, the best way to benefit from both new and existing customers is to look at actively reducing your CAC.
How Can You Improve Customer Acquisition Costs?
If you are spending too much on customer acquisition, you will soon realise just how high the cost of CAC can be for your bottom line. Some of the ways that you can reduce these costs include the following:
- Focus on your on-site conversion. Invest in A/B testing, consider email personalisation, segmentation, lead scoring and other strategies that help to increase conversion, improve your shopping cart conversion so that you reduce abandoned cart rates, and do whatever else you can do to improve your landing pages, site speed, mobile optimisation, and e-commerce conversion. The easier it is to convert new leads, the more chance you have of reducing CAC.
- Enhance customer experience. This means improving the customer experience in any way you can, whether that is by adding in incentives such as discounts or limited time sign-up bonuses, listening to what current customers want, adding features to your products or shop that improve usability and overall experience, reducing your costs, removing shipping costs or finding any other way to provide a better experience for customers. Create demo videos that explain how to use your products and answer sales questions. Create an FAQ page that lists common questions, along with simple answers. List typical sales objections and provide answers.
- Invest in customer relationships. Marketing automation, CRM tools and other platforms that help you provide a consistent level of service to customers will all help to build relationships. Find out why people leave your shop without making a purchase. Listen to customer feedback. Take the time to respond to queries and comments. Consider customer loyalty and other strategies that add value.
When you focus your efforts on both customer retention as well as customer acquisition, you will have the best chance at succeeding in your goals. To find out more about how to improve your customer acquisition rates as well as your retention rates, contact the Grapevine Interactive team today.