What is the Average Cost Per Customer Acquisition?
The average customer acquisition cost is used by upper management to determine how much it cost to acquire a customer and increase ROI. Customer acquisition cost is a high-level metric to measure the success of marketing campaigns. The higher the average customer acquisition cost the lower the success of the marketing expenses. Resources are allocated to marketing efforts depending on the customer acquisition cost.
Cost per customer acquisition is key for communicating marketing ROI to upper management. Continue reading to learn how to communicate the success of a marketing campaign to upper management and maximize marketing spend.
Why Upper Management Focuses on the Average Cost Per Customer Acquisition?
Upper management meaning the c-level executives are focused on growing the company. Acquiring customers at a lower expense leads to a higher profit margin. When the company’s profit margin improves this translates to growth of the company. More so, this metric helps demonstrate the value of a customer for the company.
Once a lead has moved through the sales funnel and becomes a customer. Understanding how much that customer is costing the company could help the company measure the value of the customer over its lifetime. Internal operations refer to this as ltv to cac ratio meaning “Lifetime Value of a Customer” to “Customer Acquisition Cost” ratio. Having an excellent ltv to cac ratio is a great indicator of strong growth for the company.
Lower acquisition costs are a signal of a strong return on investment for ad spend. Successful companies that are growing have a strong return on investment. In order to calculate ad spend ROI, a company needs to know their marketing expenses and cost per acquisition. Lower marketing expenses are a part of a good customer acquisition cost which means higher ROI and growth for the company.
Why The Marketing Team Should Care About Customer Acquisition Cost?
When upper management is allocating funds for the upcoming marketing budget they calculate customer acquisition cost to help make their decision. Marketing teams need to understand why upper management cares about customer acquisition cost cac to demonstrate the success of marketing spend on raising a company’s profitability.
Calculating the cost of acquiring new customers is possible for all marketing strategies. Including:
- Search engine optimization
- Social media marketing
- Google paid search campaigns
- Direct sales
- Facebook marketing
- Email marketing
- Linkedin advertising
- Digital ads
Remember, marketing costs are only justified when they demonstrate a high growth rate for the company. Upper management cares about customer costs because a company’s profitability and ROI are calculated using these costs.
How to Communicate the Cost Per Acquiring a Customer to Upper Management?
Communicating the cost to acquire customers to upper management depends on understanding marketing output KPI’s and how they correlate with CAC. Depending on the marketing strategy you are using the key performance indicators are different.
Search engine optimization’s key performance indicators could be organic traffic, organic clicks, click-through rate, average position, organic leads generated, conversion rate, and organic sales.
Increases in organic traffic could lead to increases in organic leads and higher conversion rates. More organic leads that convert at a higher rate turn into more sales at a lower cost. The other benefit of SEO or search engine optimization is marketing expenses go down over time. Unlike paid traffic, organic traffic stays even when advertising investments have stopped. In upper management speak this means a higher customer lifetime value and a lower total cost of acquiring a customer and more growth for the company.
No matter which marketing strategy you are using focus on communicating how marketing KPIs led to acquiring more paying customers at a lower cost.
How Do You Measure CAC?
Measure CAC by calculating the costs associated with customer acquisition (marketing, sales, employee salaries, etc.) and then divide that amount by the number of customers acquired.
For example, annual marketing spends of $1 million plus employee salaries of $2 million divided by 1,000 new customers acquired. Equals a cost per acquisition of $3,000 per customer.
How do you Calculate Customer Acquisition Costs?
At face value, the cost of acquiring a customer of $3,000 appears high. However, it depends on how much a customer spends on the product or service. An industrial equipment company may be selling a product with an average sales value of $20,000. In this situation, a $3,000 cost per acquiring a customer is a 566% return on investment.
Not to mention the lifetime value of the customer. During the same time period, a customer may pay for repairs associated with the equipment or they may sign up for a subscription service. Customers that spend money on repairs and subscriptions equal a low CAC and a higher ROI and profit margin.
What Does the Sales Cycle Have to Do With the Cost Per Customer Acquisition?
Sales costs are another factor that comes into play to improve customer acquisition cost. The longer a sales cycle the more money that is going to be spent to acquire new customers. Understanding how to shorten the time from prospecting to closing new customers is crucial to lowering CAC.
What is the Average Customer Acquisition Cost Per Industry for B2B Companies?
|Industry||Average Organic CAC||Average Inorganic CAC|
|Industrial IoT and Tech Industry Spends||$557||$788|
|Manufacturing & Distribution||$662||$905|
|Oil & Gas||$710||$1,003|
|Printed Circuit Board Design & Manufacturing||$330||$658|
|Point of Sale||$680||$841|
What is the Average Cost Per Customer Acquisition Per Industry for B2C Companies?
|Industry||Average Organic CAC||Average Inorganic CAC|
|Higher Education & College||$862||$1,985|
|Luxury Real Estate||$660||$1,185|
“How Do I Reduce My Customer Acquisition Cost?”
From looking at the graphs above it is obvious that organic marketing has a lower average customer acquisition cost than inorganic marketing. Organic marketing is a great method to lower the average customer acquisition costs but the downside is it takes time. This means if you are a business that needs a sustainable source of leads now. Then it may be best for you to work on getting a paid lead generation strategy going first and then move to organic marketing.
What is the Best Advertising Investment to Reduce Customer Acquisition Costs?
On the upside, organic marketing is a very powerful lead generation tool to lower CAC and increase ROI over the long term. Similar to when a train first starts organic marketing starts out slow. Further down the tracks, the train is an unstoppable force and organic marketing works the same way. Upfront organic marketing is an investment that pays dividends for years after you stopped paying for marketing. Traffic generated organically is traffic that continues to visit your website month after month. Unlike paid advertising where the moment you stop paying for ads the traffic stops.
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What is Customer Lifetime Value?
Customer lifetime value (CLV) is the value a customer produces for your company over the lifetime of the relationship. Typically, customer lifetime value is predicated by the revenue generated by the customer over the relationship. CLV is a key performance indicator for measuring customer acquisition costs, ROI, and customer experience.
The best way to lower CAC is to increase CLV because it cost less to keep existing customers than it cost to acquire new customers.
Why Upper Management Focuses on CLV?
Upper management focuses on CLV because it is a key performance indicator of growth for the company. The longer a customer stays with a company the more profit the company makes. Although, it is important to focus on the cost to serve too. The cost to serve is how much it cost you to produce the product or service for the customer. Certain customers may take up more costs than it is worth for continuing to serve the customer. In these cases, it may be best to acquire a new customer rather than retain the existing customer.
On the other hand, there may be situations where you are noticing a dropoff in retention rates before achieving profitability. Especially if you sell a recurring subscription that is not profitable unless you retain the customer for longer periods of time.
Why the Marketing Team Should Care about the CLV?
The marketing team should care about CLV because it could help determine if they are generating high quality leads. Leads that are high quality will convert at a higher rate and have a long customer lifetime value because the customer is qualified.
If the business is experiencing a high customer acquisition cost and a low CLV then the marketing team may want to adjust their strategy. Upper management takes into account these key performance indicators when allocating the marketing budget.
How to Communicate the CLV to Upper Management?
When communicating the success of marketing for the customer lifetime value focus on the historical relationship timeline. Measure the average CLV over the relationship before the latest marketing campaign. Use the same length of time to measure the value of the CLV after the latest marketing campaign. Communicate the percentage and numerical value increase from the previous CLV to the present CLV. Then communicate how this CLV is leading to a lower customer acquisition cost and a higher return on marketing spend. Be certain to use a large amount of data and take into account other factors to avoid statistical anomalies in the results.
How is CLV Correlated with Customer Acquisition Costs?
How much your customers are costing or CLV goes hand in hand with customer acquisition cost.
For example, if a steel factory produces steel for $1,000 per kilo and it cost more than $1,000 to acquire a customer for the steel. Then the steel factory is losing money unless they make adjustments to their marketing, sales, and advertising. Not to mention the cost to serve the customer over the lifetime of the relationship as mentioned earlier in the article.
What does the Sales Cycle Have to Do with CLV?
From the start of the sales cycle to the end of the sales cycle the customer lifetime value is there at every step. CLV is the value of the relationship of the customer and this includes the sales process too.
Businesses need to take into account the costs of prospecting, approaching, presenting, handling objections, closing, and following up. Some customers may have more costs if they take a longer time to close through this cycle. Which means the value of the customer over the relationship goes down. This could help the sales team prequalify out prospects that are lookie loo’s from customers with a genuine need for the product or service.
What Does Customer Retention Have to Do With CLV?
Customer retention plays a huge part in the role of CLV. On average, the longer a customer is retained the greater the value of the customer. On the opposite end, customers that are costing the company more than what the product or service is worth to retain are not worth retaining. Using the metric of CLV could help the customer experience team communicate with the other teams to decide which customers to drop and retain.
“How Do I Increase the Average CLV?”
Increasing the average CLV for a company is a team effort. That involves the sales, customer experience, marketing, development, and production team. Measuring how CLV interacts with each part of the business team could help a business gauge how to improve.
Improving the delivery of sales, customer experience, marketing, development, and production will increase the average customer lifetime value over time.
What is the Best Advertising Investment to Increase CLV?
The best advertising investment to increase customer lifetime value is organic marketing. Search engine optimization is an organic marketing strategy focused on optimizing for search engines. On Google, customers are searching for products and services to buy right now. Organic listings are the listings directly below the paid listings on Google.
On average organic listings receive 51% on average of all website traffic. Paid traffic only attains 15%. The kicker is organic traffic once acquired is not going away unless a competitor overtakes your listing. Many industries have dominated the rankings for years and received free traffic leading to a high average CLV and a low CAC.
The downside of organic marketing such as SEO is that it takes a large time and financial investment upfront. Companies could expect to commit a minimum of 6 months to begin to see results from SEO. Businesses that commit a year to 3 years to SEO see fantastic results. On average, SEO agencies charge anywhere from $2,500 to $10,000+ per month.
Do not cheap out on SEO it will come back to bite you. Many companies use blackhat tactics that involve hacking other websites and manipulating search engines inorganically. Working with these agencies could result in your business website being permanently banned from Google. In fact, there have been news articles such as this one from Buzzfeed. Where well known brands such as DFY Links and Serpninja were caught hacking websites to manipulate search engines.
Seek out transparency in the process, communication, and expectations when choosing an SEO agency. An agency that focuses on data driven SEO which could explain exactly why what they are doing works based on the data. If you need help evaluating an SEO agency we are giving away free SEO agency evaluations for a limited time.