Increasing Potential Returns: Identifying Your Customer Acquisition Cost VS Customer Lifetime Value

My boss, Jean-Pierre Prieto inspired me to write this article. Thank you  for continually feeding my business mind with business ideas and concepts.

The world of business is governed by applied economics, marketing and business laws, and theories and principles. Two of these play a big part in how businesses acquire, retain and measure customer value – customer acquisition cost and customer lifetime value.

Customer acquisition cost (CAC) is essentially how much a company spends to get a new customer. The usual elements that factor into a business’ CAC are the marketing expenses and the salaries paid out to employees, but it changes depending on the business’ industry.

Customer lifetime value (CLV), on the other hand, is how much a particular customer can offer to the business past a one-time sale. It’s the building of a relationship between the two parties so that the customer is compelled to keep supporting the business, leading to a steady flow of revenue for the latter in the long run.

Calculating CAC and CLV

A company’s CAC is calculated by compiling the total expenditures and then dividing it by the number of customers acquired on a specific period of time.  There are three important costs that need to be considered in that formula; the costs of locating targeted leads, the costs of converting leads into customers, and the costs of keeping these newly-converted customers.

Calculating the CLV is a little more complicated. It requires making projections, having to consider the possibilities of losing customers for particular reasons, and weighing the costs of keeping existing customers or replacing them. To put it simply, identifying the CLV is accomplished by subtracting all the expected costs from the expected gains in retaining the customer.

A business that has to keep spending more and more money to get new customers while only managing to retain a few will eventually experience a collapse. As such, a business should always strive for keeping the CAC low and the CLV high.

Methods to Reduce CAC 

1. Analytical Marketing

Analytical marketing is all about understanding the needs and wants of the customers by collecting relevant data regarding the kind of audience these customers belong to and their behavior when interacting with the business. This means finding out which demographics a business’ prospects and customers lie, what products and/or services do they pay for, how often they make purchases and which stores they go to, etc.

Once a company knows exactly what their customers like and don’t like, it can then begin to not just improve the quality of its products and/or services, but also mold its marketing strategies to maximize their impact on the target audience. This leads to more efficiency in acquiring and retaining customers.

Gathering data about the customers has been done for quite some time through surveys and questionnaires, but the growth of the Internet and social media has provided even more platforms for businesses to find out how their customers think and act.

2. Email Marketing

One of the simplest ways in lowering CAC is by utilizing one of the more “traditional” online communication channels which is email. It has been used in the past by businesses to keep close contact with its customers, but the rise of social media’s relevance has taken the spotlight away from email marketing.

It still has its advantages though, as it can speak directly to a business’ target audience in a more focused and in-depth manner than the more general and brief communication through social media. This is made all the more apparent when it’s used to supplement primary lead conversion practices.

An example would be collecting the email addresses of people attending a business’ seminar or networking activity, and then following them up afterwards via email to attend another activity and then possibly make a purchase. Emailing is free, so there is no additional cost in turning the lead into a paying customer.

3. Inbound Marketing

In contrast to traditional marketing methods wherein the customers are bombarded with messages that tell them to buy the products/services being sold, inbound marketing achieves its goals by attracting targeted leads into a business with quality content.

This kind of marketing was developed for this digital age of information. It shifts the focus away from having to spend on disruptive advertisements that pushes an obvious agenda of selling to providing relevant and helpful content that people look for when browsing online.

Starbucks is a prime example of using inbound marketing to lower CAC, as it leveraged its powerful brand in social media to connect to its loyal customers instead of relying on expensive traditional advertising.

Methods to Increase CLV

1. Reduce Customer Churn Rate

Customer churn rate usually refers to the number of customers that stop subscribing to a business’ service, but it can also refer to the number of customers that stop buying products from a business. A recorded churn rate can also be used to project future churn rates, especially when data is collected as to why these customers have ceased their support such as rising prices or a decrease in product/service quality.

Gathering that data is absolutely critical in reducing the churn rate, as finding out the reasons for their choice to discontinue the service will shed light on what can be done to keep the existing customers and possibly win back those who left. One solution for services is to provide customers more options, and another is to offer an upgraded version of the service.

Once the gaps in the service or the products are addressed, the higher the chances that customers will keep patronizing the business, increasing CLV.

2. Engage Customers

When customers spend their hard-earned money to buy a product or subscribe to a service, they expect to be treated with the care and respect deserving of their decision to support a business. Therefore, the simplest way to retain them and increase each one’s CLV is to engage them.

They need their voices to be heard and their concerns addressed. There are many platforms today that facilitate customer engagement, including the traditional customer service hotlines and the rewards programs for loyal customers as well as the modern avenues of social media and online forums.

Having convinced leads to buy a product or sign up for a service does not mean that a business will forever have them in good graces. This goes back to building a relationship with customers, as understanding them helps make a company make much more informed choices in providing better products and services.

3. Inbound Marketing

Inbound marketing not only helps reduce CAC, it can also increase CLV in a number of ways. First, a company that seeks to retain its customer base for the long haul has to give its customers a reason to stay, and inbound marketing achieves that by continuously providing quality content through all the relevant channels.

Another way for business to utilize inbound marketing for CLV is to give customers the ability to express their views regarding the products/services. Customers want their voices to be heard, and they will more likely believe the word of other customers over the business’ biased appraisal of the products/services. Both compliments and complaints must then be taken into consideration, and answers should be provided to address the issues.

Conclusion

Most businesses get caught up in acquiring more and more customers, especially for start-ups that are eager to grow, not knowing how they plan on actually keeping these customers in the long run. As a result, they end up spending more money while hemorrhaging what should have been a good foundation.