The success of any business comes down to one thing; its customers. Anyone who wants to run a successful business must understand two critical variables and how to balance them. The first variable is the cost to acquire customers or CAC. Customer acquisition is the process of bringing in new customers to your business. This leads right into the second variable, how you will monetize these customers or the loan to value, commonly referred to as the LTV.
Calculating the cost to acquire a customer is quite simple. One must take the business's entire cost of sales and marketing over a given time period and divide it by the number of customers that were acquired in that time period. To have a "balanced" business model, the cost to acquire a customer must be less than the price to monetize one. For instance, if a business was to spend $400 on marketing in one year and acquired 400 customers, its CAC would be $4.00. A business needs the CAC to be less than the LTV to be successful.
With recent technology, the price for acquiring customers has decreased significantly, making new types of businesses possible. While maintaining this balance may seem simple, there are many ways things can take a turn for the worse. For example, most people that start a business are confident that their product will sell efficiently and be loved by customers. Now, while optimism may be a good thing, businessmen and women will sometimes underestimate the cost of acquiring customers, which can ultimately lead to a business failing.
So, what does the customer acquisition cost actually consist of? A business's customer acquisition cost includes its advertising costs, creative costs, technical costs, publishing costs, production costs, and more. The CAC is not just important to the business itself, but it is also a meaningful metric for potential investors. When people invest in a business, they look at how profitable the business is on a given day and how the business will look in the future. This is why they place an enormous focus on how much the business needs to spend to acquire a customer versus how much money the business can earn from the customer.
So, how can a business improve its customer acquisition cost? To improve your CAC, you can either raise the customer value or consider implementing customer relationship management. To raise the customer value, a business must enhance the product they're selling. To do this, a business can add new features to their product or create different versions of their product that customers would find appealing. Implementing customer relationship management is another way to improve your CAC, and it can be extremely beneficial. This type of management will help to increase process efficiencies and customer satisfaction. Having customer relationship management makes tracking customer interactions with your business easier, and if you can track this, your business will be able to automate marketing processes. Automated marketing allows for businesses to target customers with automated messages through social media, email, or text.
The customer acquisition cost is single-handedly one of the most important factors for analyzing and judging a business, specifically, the business's future. A business's success is heavily dependent on the CAC. As a business expands, it must make sure to optimize its CAC to not just grow but survive in the economy.