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.

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.

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?

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.

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 Calculate Customer Acquisition Costs?

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.

Source:

Firstpagesage

Source:

Firstpagesage

What is the Best Advertising Investment to Reduce Customer Acquisition Costs?

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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 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.

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?

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.

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.

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

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.