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 charges. 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 using customer acquisition costs and LTV by channels.

Upper management meaning the c-level executives are focused on growing the firm. Acquiring customers at a lower expense leads to a higher profit margin. When the firm’s profit margin improves this translates to growth of the firm. More so, this customer acquisition cost metric helps demonstrate the value of a customer for the firm.

Once a lead has moved through the sales funnel and becomes a customer. Understanding how much that customer is costing the firm could help the firm measure the value of the customer over its lifetime aka the customer acquisition cost and LTV. 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 firm.

Lower customer 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 and an excellent customer acquisition cost. In order to calculate ad spend ROI, a firm needs to know their marketing charges and customer acquisition cost. Lower marketing charges are a part of a good customer acquisition cost which means higher ROI and growth for the firm.

When upper management is allocating resources for the upcoming marketing budget they calculate customer acquisition cost and LTV ratio by channels to help make their decision. Marketing teams need to understand why upper management cares about customer acquisition cost cac and LTV to demonstrate the success of marketing spend on raising a firm’s profitability from their customer base.

Calculating the acquisition cost of acquiring new customers is possible for all marketing strategies. Including:

• Search engine optimization customer acquisition cost
• Social media marketing customer acquisition cost
• Google paid search campaigns customer acquisition cost
• Direct sales customer acquisition cost
• Facebook marketing costs
• Email marketing costs
• Linkedin advertising costs and LTV
• Digital ads costs and LTV 

Remember, marketing costs are only justified when they demonstrate a high growth rate for the firm no matter the industries. Upper management at businesses cares about customer costs because a firm’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 and the costs are too. 

For example:

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 based on the costs and LTV for businesses.

Increases in organic traffic could lead to increases in organic leads and higher conversion rates from the customer acquisition cost. More organic leads that convert at a higher rate turn into more sales at a lower cost based on the LTV for businesses no matter the industries and the customer acquisition cost matters too. The other benefit of SEO or search engine optimization is marketing charges go down over time. Unlike paid traffic, organic traffic stays even when advertising investments have stopped for the channels. 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 firm based on the channels.

No matter which marketing strategy you are using focus on communicating how marketing KPIs led to acquiring more paying customers at a lower cost from the channels.

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 firm 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 depending on the ratio of resources allocated to acquire this customer base and the churn rate for the target market.

Not to mention the lifetime value of the customer and the customer referral rate to acquire new potential customers using the acquisition strategy. 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.

Sales costs are another factor that comes into play to improve customer acquisition cost (CAC). The longer a sales cycle the more money that is going to be spent to acquire new customers (CAC). Understanding how to shorten the time from prospecting to closing new customers is crucial to lowering CAC.

Source:

Firstpagesage

Source:

Firstpagesage

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 CAC?

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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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.

Upper management focuses on CLV because it is a key performance indicator of growth for the firm. The longer a customer stays with a firm the more profit the firm 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.

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 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.

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.

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 firm 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.

What is the Best Advertising Investment to Increase CLV and Lower Churn Rate?

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. 

What is the Average Customer Acquisition Cost By Industry?

In the vast landscape of digital marketing, understanding the average Customer Acquisition Cost (CAC) by industry is pivotal. CAC is a reflection of the financial and time investments businesses make to attract new customers. For instance, while organic marketing strategies like SEO might have a higher upfront cost, they often lead to a lower CAC in the long run. This is evident when observing industries that have dominated organic listings on Google for years. These industries enjoy a high average Customer Lifetime Value (CLV) and a significantly reduced CAC.

Organic listings, sitting just below the paid ones on Google, capture a whopping 51% of website traffic on average. In contrast, paid traffic garners only 15%. This disparity underscores the value of organic traffic. Once you’ve acquired it, it remains consistent unless a competitor outperforms your listing. Such stability in organic traffic translates to a consistent base, which in turn, often means a more favorable CAC for businesses.

However, it’s essential to approach organic marketing with caution. The initial time and financial commitment can be substantial. Companies might need to allocate resources for at least 6 months to start witnessing tangible results from SEO. But those who persevere and invest in quality SEO for 1 to 3 years typically reap remarkable benefits. The story of firms that have achieved a low CAC through persistent and quality SEO efforts is a testament to the potential of organic marketing.

Which Industry Has the Highest Customer Acquisition Cost?

The digital marketing realm is vast, and the Customer Acquisition Cost (CAC) varies significantly across industries. While the article delves into the merits of organic marketing, it doesn’t specify which industry faces the highest CAC. However, a common narrative in the marketing world is that industries with high competition and longer sales cycles, such as real estate or legal services, often grapple with elevated CACs.

Imagine a bustling city where every billboard is occupied by real estate advertisements. Each agency is vying for the attention of potential buyers, driving up advertising costs and, consequently, the CAC. Similarly, legal firms in competitive regions might spend extensively on ads, consultations, and client nurturing, pushing their CAC to higher brackets.

It’s crucial for firms in these high-CAC industries to strategize effectively. Investing in organic marketing, as highlighted in the article, can be a game-changer. Over time, dominating organic listings can lead to a more favorable CAC, even in industries where the initial costs seem daunting.

What is a Good Cost Per Customer Acquisition?

Defining a ‘good’ Cost Per Customer Acquisition (CAC) is not a one-size-fits-all answer. It’s intrinsically tied to the industry, competition, and the Lifetime Value (CLV). A good rule of thumb is that your CAC should be significantly lower than your CLV. This ensures profitability in the long run. For instance, if a firm invests heavily in organic marketing, they might face a higher upfront CAC. But with organic listings capturing 51% of website traffic on average, the long-term returns can be substantial.

Imagine a local bakery that spends $100 on advertising and gains 10 new customers. Their CAC is $10. If each customer spends $50 on average and returns multiple times, the bakery’s CLV far surpasses the CAC, indicating a successful marketing strategy. Conversely, if the bakery’s customers only spent $5 on average, the CAC would be too high, signaling a need for strategy revision.

In essence, a good CAC is relative. It’s about balance and ensuring that the investment in acquiring a customer is justified by the value they bring over time. Businesses should continuously evaluate and adjust their strategies, aiming for a CAC that maximizes profitability while fostering growth.

What is the Average CAC for Food Industry?

The food industry, with its vast array of segments from restaurants to packaged goods, has a diverse range of Customer Acquisition Costs (CAC). On average, the CAC can vary based on factors like location, competition, and target audience. For instance, a new gourmet restaurant in a bustling city might spend more on advertising and promotions to stand out, leading to a higher initial CAC.

Imagine a food truck owner, John, who spends $500 on ads and attracts 100 new customers. His CAC is $5. However, if a high-end restaurant spends $5000 on a grand opening event and gains 50 customers, their CAC is $100. Both scenarios are within the food industry, yet the CAC varies dramatically based on the business model and strategy.

In essence, while there’s no fixed ‘average’ CAC for the food industry, firms should aim for a CAC that aligns with their expected Lifetime Value (CLV). Continual monitoring and strategy adjustments can help maintain a balance that ensures profitability and growth.