If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
Customer acquisition is a must for any business that wants to keep their doors open.
It’s simple: no customers = no business.
As a result, many businesses operate at a loss for some time to ramp up customer acquisition. The idea is that eventually the investment will pay off. After all, it did for Amazon, right?
However, operating at a loss isn’t a strategy anyone should blindly follow. Here, we’ll walk through what customer acquisition is, the formulas you need to understand to create a profitable customer acquisition strategy, and five steps to help you get started.
Simply put, customer acquisition is the process of obtaining new customers. That sounds simple enough. However, a lot goes into an effective customer acquisition strategy. In fact, nailing customer acquisition can be the difference between being cash flow positive or not.
Customer acquisition cost (CAC) is the average cost of acquiring a customer. To calculate your customer acquisition cost, you simply divide the amount of money you spend on sales and marketing by your total number of customers. So, the CAC formula is:
Sales and Marketing Expenses ÷ Total Number of Customers = CAC
This value and lifetime customer value (LCV), sometimes referred to as customer lifetime value (CLV) or lifetime value (LTV), are two sides of the same coin. A few different formulas exist for calculating CLV, and one of the simplest is:
Average Purchase Amount × Frequency of Purchases × Customer Lifespan = CLV
For example, suppose your average customer makes a $100 purchase once a year and remains a customer for three years. Your CLV will equal $300 ($100 X 1 X 3 = $300).
As you might expect, “good” and “bad” CAC and CLV numbers are relative to your business model.
For example, a subscription service targeting consumers like Netflix can be expected to have much lower CAC numbers than a B2B (business to business) sales organization engaging in highly complex and technical sales deals. While the former can rely heavily on ads, social media, and the power of networks, the latter may have to invest significant time and resources, for example writing a business proposal, just to acquire a single customer.
Of course, these calculations don’t tell the whole story. For example, the Net Present Value (NPV) of your CLV should be taken into account. However, they are still excellent tools for calculating the profitability of client acquisition in your business.
Effective customer acquisition requires a mix of creativity and strategy.
While you need to be creative when it comes to engaging your customers, you’ll need to be strategic when it comes to quantifying your numbers and assessing what’s working and what isn’t.
Below, we’ll walk through five steps to help you get started building your own customer acquisition strategy.
Knowing your customers is the cornerstone of B2C and B2B marketing strategies alike. Your sales tactics won’t work well if you don’t understand who you’re selling to.
Effective acquisition marketing involves:
This step holds true even if you haven’t sold a single unit yet. Chances are your product or service isn’t for everyone. If you know who your potential customers are, you can be more efficient in your marketing spend.
Additionally, if you’re already in business, capturing as much customer data as ethically practical can help you identify your most profitable customers.
For example, if you see millennials in rural areas have an LCV of $500 while no other demographic has an LCV above $300, you can lean into that with targeted marketing campaigns.
Because of its relevance to your sustainability and profitability, you need to understand your customer lifetime value early in the new client acquisition process. If you’re not off the ground yet, you can use expected values to create realistic benchmarks.
CLV is important because coupled with CAC, it tells you what adding additional customers does for your business. A few rules of thumb for customer acquisition cost and customer lifetime value:
Effective marketing is an important part of business development and customer acquisition. To be both efficient and effective in your marketing, you’ll need to find a mix of channels that work for you.
Given you already know your customer from step one, understanding what channels are best for reaching them should be straightforward.
While the specific platforms and strategies you use may vary depending on your sales model, e.g., B2B sales is significantly different than B2C sales, here are a few tried and true approaches to consider:
As you build your acquisition marketing plan, it is important to remember the different stages of your customer journey map.
To begin, you need to build brand awareness, so people know who your business is. From there, you’ll need to get them to consider using your product or service, and then convert that to a sale.
After the sale, you can further engage with your customer and potentially make them a proactive promoter of your brand.
Follow-up emails, abandoned cart emails, and targeted email campaigns can be great ways to acquire customers. However, doing each of those things manually can be time consuming.
CRM software can help automate and scale these workflows to lower your customer acquisition costs.
For example, you can integrate Salesforce with third party e-commerce software using APIs (application programming interfaces) or you can use their B2C Commerce and Marketing Cloud solutions to build abandoned cart workflows.
In order to master customer acquisition and keep costs down, you need to track what works and what doesn’t. Most businesses understand the importance of customer acquisition, but not all of them track their costs or the effectiveness of their methods.
In fact, Salesforce found that only 51% of marketers track CAC and even fewer, 43%, track CLV. We tend to improve at what we measure, so make tracking the effectiveness of your customer acquisition efforts a priority.
Nailing customer acquisition is easier said than done.
CRM and email marketing software can help streamline and scale the process, but the fundamentals must be in place as well. This means you need the right mix of product, knowledge about your customers, and marketing strategies.
Once you put all those together, finding an approach that keeps your customer acquisition costs at about a 25-33% of your customer lifetime value can be a great recipe for profitability.
Our Small Business Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.