The true cost of customer acquisition is critical factor in a new
business survival and often underestimated in a growing business. The cost of
getting customers can be the difference between success and failure no matter
how good a business believes its product to be. I once read that the goal
of any business is to acquire, develop and maintain customers at a profit. The
develop and maintain aspects are more clear forward but let’s focus on the cost
associated with acquiring new customers regardless of the channel.
Every business needs to acquire new customers to make products and
businesses work. Whether the product is aimed at enterprises paying big money
or getting thousands of visitors to a website, how a business gets and the cost
of getting customers is the important part.
The Definition of Customer Acquisition could be defined as “The
process of persuading someone to purchase a company’s goods or services”. The
cost associated with the customer acquisition process is a critical measure for
a business to evaluate in tandem with how much value having each customer
brings to the business.
Is The Business Ready for Customer Acquisition?
Paper never refuses ink and this saying
has been true in many a business or sales plan when it comes to putting a cost
on customer acquisition. The cost is not just the marketing or sales cost but
the time and resource cost to getting new customers. Has the business planned
for the sales cycle, the demos, the travel, product trials or has a website
planned for the cost from free signups to paid, customer or product support
prior to a customer making a purchase. In other words, can a business survive
while potential customers go through the acquisition cycle? While a quote like
“move fast and break things” is exciting in a company start-up situation, it
may not be the best advice when it comes to customer acquisition.
The decision
to start spending investor or shareholder money taking a product to market and
begin acquiring new customers should be given the weight it deserves.
Entrepreneurs or a business might have spent months or years developing the
product, so the execution of the customer acquisition strategy has to be
thought out very carefully.
Even before you spend a cent on customer
acquisition ask the questions “is the product ready for some/many customers”?
Are there still bugs that will make the customer interaction with the product
flawed? While the saying “done is better than perfect” to avoid feature creep
is practical; it would be a mistake to launch a broken product and fall at the
first hurdle.
To take a step back into the business plan
around customer acquisition, can a business tick the box on questions like; how
many sales calls per day do you expect the salesperson to make, do they have a
target list of suspects and prospects, how much activity on the website can the
servers handle? Do you have the customer support with the knowledge required to
respond to the questions from new customers? Does the product value proposition
the salesperson has to sell make sense to people outside the company? In other
words, have you done customer validation? These are the type of questions that
you need to answer before committing money to a launch.
Being Prepared Always Matters
Any customer acquisition process is not
straight forward or predictable but especially so for new companies, but
that doesn't mean a plan is not useful or necessary. The customer
acquisition process is far from an exact science. There are many things
that can (and do) go wrong, however there are some things that any business can
do to mitigate risk and improve the chances of successfully acquiring new
customers. Be clear with your team what “Cost to Acquire Customers” (CAC)
means, is it paying customers, trial customers, engaged prospects or even
website registrations. In the long run it should only mean the cost to
acquire a paying customer.
Estimate the Cost of Customer Acquisition
Money for new product or new business
launches is hard won. The budget and time for a start-up may be tight, so the
business needs to estimate “worst case scenario” the cost to acquire customers
(CAC) before beginning the marketing or sales process. A businesses CAC is
loosely defined as the cost of ALL the sales and marketing expenses over a
given period of time, divided by the number of customers the business plans to
acquire in that time frame. While no business can have a firm sense
of the CAC until they begin acquiring customers, having an estimate will help
the business leaders prepare to act accordingly.
Logic rules, no matter how excited a
business is about getting it out there, do not underestimate the impact of
starting the customer acquisitions spend before the product is ready. The
greatest risk apart from alienating potential customers by launching a flawed
product is the money a business can burn through before it realises it got
something in the product wrong. Every business should ask, what is the
baseline product I am willing to “show” potential customers and in what target
markets?
Thread carefully in the world of social
media and PR, spending time and money on journalists to line up business or
product coverage of your launch, only to find out that the product is delayed
or has issues, can put the business credibility in jeopardy . Journalists lose
interest pretty quickly and are never your friends.
Do Realistic CAC calculations
While a business waits for SEO efforts to
kick in, a business may utilise Google Ad Words to drive traffic for (a) for
lead generation or (b) sales. Take a look at this example. The cost per click
works out at 50 cents, the resulting 1000 website visitors converting to a
trial rate of 5% (50) at a cost of €500. These 50 trials are then converting to
paid customers at the rate of 10% which is 5. So each customer is costing €100
in just lead generation expense excluding sales/product/support costs. For many
companies in the B2C space or in the B2B space with software using the web as
their main acquisition channel, it can be hard to get the consumer to pay more
than €100 for the product or service
Many business underestimate or do not
budget for a realistic CAC, if we take the above example the cost of customer
acquisition can climb rapidly if leads require a sales person to convert them.
This human interaction can be as simple as email follow ups right up to inside
sales people doing multiple sales calls and demos. Depending on the
trial/registration rate along with sales conversation rates the cost can
vary from €400 to over €5,000 per new customer acquired, depending on the level
of interaction needed.
Another CAC calculation is to look at the
cost of a field sales force. The fully loaded cost of a field sales executive
with travel, car, expenses and salary can push the CAC into over €10,000 in
enterprise sales.
In trying to address the single most
important early-stage question – customer acquisition – it is easy to waste a
lot of money in the wrong channels and on the wrong customer acquisition
tactics (lots of companies in the graveyard from just this one failure),
especially the new companies that went toe-to-toe with the big guys and
can got blown away.
Every business has to execute in a different way
A business will only thrive by marketing
and selling smart; acquiring customers in an economic way and in a way that
differentiates the business from the crowd. To goal is to build a customer
acquisition strategy for paying customers the business does not have to keep paying
for every month.
Create Demand
In larger companies with deeper pockets
while the customer acquisition isn't exactly simple, they do have
more resources. The process of customer acquisition is more challenging
for newer companies. Established business’s will utilise bigger budgets, have
greater brand awareness, and an ever growing community of influencers. Most new
businesses will not launch with a partnership with an established brand like
Microsoft, Apple or Google where the demand for the product already exists.
Instead a new business has to allocate sales resources and money wisely to
fight (and a fight it is) to let potential customers or audiences know that you
exist, explain to them why they should show interest, and initially even
offering to go the extra mile by holding their hand through the sales process.
The focus of everyone in a new business is
not only to create the brand but also the demand. Sales and marketing are not
two different departments, the person leading the marketing drive needs control
spend on brand marketing and really understand how to execute lead nurturing,
content marketing, web demand generation programs and work hard at marketing
efforts that require time but not money. Marketing and sales need to work at
the hip to generate a steady, growing stream of leads each and every month.”
Acquiring new customers means
understanding what makes your customers tick and investing in inbound marketing strategies such as
content and quality articles, got onto the forums, become a subject matter
expert and invest in search engine optimization (SEO) as a longer term tactic.
The Business Model
Business model viability, in the majority
of new companies, will come down to balancing two things:
Cost to Acquire Customers (CAC)
The ability to extract value from customers, or LTV (Lifetime
Value of a Customer)
Web based companies have long understood
these metrics as they have a much easier easy way to measure them. However
there are huge benefits for all businesses to look at these same metrics.
To repeat the message from a few
paragraphs back, to calculate the cost to acquire a customer, CAC, a business
needs to take the entire cost of sales and marketing over a given period,
including salaries and other headcount related expenses, and divide it by the
number of customers that a business has acquired in that period. (In pure
web plays where the headcount does not need to scale as customer acquisition
scales, it is also very useful to look customer acquisition costs with/without
the headcount costs.)
To compute the Lifetime Value of a
Customer, LTV, you would look at the margin that you would expect to make from
that customer over the lifetime of your relationship. Margin should take into
consideration any support, installation, and servicing costs.
Manage Optimism with Reality
To be in business requires huge optimism,
and in a belief in how much customers will want to buy your product.
Unfortunately this can lead businesses to believe that customers will be
kicking down the doors to purchase the product. This has the effect of grossly
underestimating the cost it will take to acquire customers. In too many
companies there is little or no focus on how much it will cost to acquire
customers. Vague strategies along the lines of web marketing, and/or viral
growth with no numbers are not business.
To finish, a well thought out CAC plan
outlines the need to acquire customers through a series of steps like SEO, SEM,
PR, Social Marketing, content marketing, direct sales, channel sales, etc. with the cost of each
step worked out. This planning brings honesty to the real cost of customer acquisition.
