If you’re an entrepreneur or run a company (or if you just watch a lot of Shark Tank), then you probably know about Customer Acquisition Cost (CAC). What you may not know is how research can play a vital role in lowering your business’s CAC, which in turn can increase your profitability and long-term viability.
In this Moonshot Collaborative blog, we explore some ways of using consumer research to lower CAC and increase total customer value.
Defining CAC and CLV
In a nutshell, CAC is calculated by dividing all of your expenses for acquiring new customers by the number of customers you gained during the same period of time. For instance, if you spent $5,000 on marketing in the first quarter of 2021 and gained 250 new customers, then your CAC was $20.
This is an important and useful metric to track, especially by marketing channel so you can optimize your marketing budget. That said, the average CAC varies widely by industry and product type and it is best to combine it with other metrics.
The most common companion metric to CAC is the lifetime value of a customer, known as CLV (or LTV). This, as the name implies, is the monetary value of your customers over the lifetime of their relationship with your company. It’s common wisdom that it costs more to acquire new customers than to retain existing ones, and maximizing CLV is a goal for all businesses. You can also use CLV to identify customer segments with the most value and target your marketing to those types of consumers.
It might be obvious, but if your CLV is less than your CAC for any sustained period of time, you’re undoubtedly losing money and you may have a viability problem since the value of those customers is less than the cost of acquiring them.
If your CLV is 1-2 times your CAC, then your customer acquisition approach might be sustainable for the long term. Having a CLV that is three or more times greater than your CAC is generally considered to be a positive sign, but there are exceptions (e.g., businesses with high fixed costs) where an even higher ratio would be needed for long-term viability.
Now that we’ve defined the terms, let’s take a look at how you can use research to reduce your customer acquisition costs and increase their lifetime value.
Segment and Target So You’re Marketing to the Right Customers
No brand can be all things to all consumers, nor should they try. If you attempt to market your product or service to everybody, you may end up reaching nobody. On the other hand, targeted and data-driven marketing approaches can help increase your conversion rates and decrease your CAC, sometimes dramatically.
By using research to segment your current and potential customers, you can uncover surprising niche audiences that will respond to your messaging and advertising — and increase your customer conversion rates.
For example, a recent Moonshot Collaborative client is rolling out a new food product with a very compelling sustainability profile. We surveyed our exclusive panel to gauge consumer interest in the product and provided detailed results for dozens of consumer attributes to identify the segments with the most interest.
Our client can use this information to target their marketing effectively, before they even launch the product. This kind of data can mean the difference between success and failure, helping you lower your CAC with better targeting that leads to higher conversions.
Test Your Collateral to Maximize Conversions
Another way of increasing conversions and lowering your CAC is to test your marketing materials with your target audience. We often see small business operators with limited marketing budgets creating their own collateral, including advertisements and landing pages. Just as often, we see these efforts yielding results that do not meet expectations.
By using research at a few key stages of the process, even companies on a limited budget can ensure that their marketing collateral is maximizing conversions and minimizing CAC. One of those key stages is during the development of the materials themselves. For instance, if you’re creating a new sponsored social media ad or a landing page for your new product, then getting some quick, qualitative consumer feedback can be insightful.
We have seen many cases when consumers raise questions or concerns about marketing materials that our clients had never even considered. Especially if you’re planning to spend large amounts on marketing, investing in a little research in the early stages is an easy decision.
Ultimately, however, you want to test your collateral in the “real world.” Whether it’s a simple A/B split test or a more complicated randomized experiment, the goal should be to quantitatively track how actual consumers respond to your marketing campaigns, and then tweak things to find what maximizes conversions.
Like everything in life, this is more easily accomplished when you have lots of money for marketing, but it’s also doable on a relatively small budget. Many online advertising platforms even have these tools built-in.
Retain Customers By Understanding What Drives or Deters Them
Research isn’t just useful for lowering your CAC. It is also an essential tool for retaining existing customers and increasing their lifetime value (CLV) to your company. Do you want to know what really drives people to buy your product? A quick follow-up survey (with a coupon code to thank them for their feedback) can yield big insights into your customers’ motivations.
If the data is fed into your customer relationship management system and/or remarketing campaigns, it can also enable you to retain customers through more personalized communications.
On the other hand, do you want to understand why some repeat customers have stopped coming back? Targeted research (with substantial incentives) can get those people to tell you why they left and maybe even get them back.
It will also help you understand what adjustments you can make to increase customer retention for people who may have similar concerns. While the two are related, CLV is arguably more important than CAC. After all, if you retain a repeat customer for the long term, you can justify a relatively high cost to acquire them.
Is your business ready to lower your CAC and increase your CLV? At Moonshot Collaborative, we’ll work with you to understand your goals and budget and determine which methods for improving CAC and CLV are best suited for your unique business needs.
Of course, an important factor in your average customer lifetime value is the price you set for your product or service. If you’re wrestling with price, don’t miss our recent blog that describes four different approaches to optimizing your price.