Last week I had a doctor’s appointment, nothing serious but I thought it was time for me to go in for a general check-up. Get my body’s key performance indicators (KPI’s) if you will.
The Dr. took my height/weight,
cholesterol and a blood sugar test.
I passed and was given the stamp of health. Now as I was leaving I began thinking about what a standardized health check up would look like for SME’s (small & medium sized enterprises). This then lead me to begin thinking about the health check we do ourselves with the 2-Min test we had developed on our home page.
If you hadn’t noticed, we have a 2-Min test on our home page & we use this as a way to make it easier to see the values that are often hidden until you start asking some more probing questions, so it is the first step to know our website visitors but more importantly to help outline their needs, and start to put numbers on what they will gain so they’ll see for themselves based on their individual businesses.
It simply clarifies key needs and determine some of your KPI’s. Now whenever I have arranged a meeting with a client or a prospect I always use 3 questions from our own 2-Min test to give me an idea on their needs and the health of the business, much like a quick check up.
Now my tools for checking up on a healthy SME are:
How many new customers did you acquire last year? (Height/Weight)
What is the lifetime value of one of your clients? (Blood Pressure)
What is your Customer Acquisition Cost? (Cholesterol Check)
Now seemingly every time I ask these questions to the Client or Prospect the first two questions are easy. They rattle the answers off as quickly as possible, like it’s a pop quiz and they’re buzzing in for their chance to answer.
However the third questions seems to get one of three reactions:
A long hmmmmm or ummmmm
A scratch of the head
Or “We have determined our Customer Acquisition Cost, but that was a couple of years ago”.
So this is where the business health check up begins, with the hard questions.
I like the hard questions, they end up leading to real change, real actionable tasks that can lead to organisational improvement.
So how can you calculate your Customer Acquisition Cost (CAC)?
To determine your customer acquisition cost there is a simple formula and a more complex formula.
Simple Customer Acquisition Formula:
A rough overview can be determined as calculating your total costs for acquiring new customers (sales & marketing expenses) and divide that by the total number of new customers.
Where: CAC is Customer Acquisition Cost
MCC is Marketing Campaign Costs
TCA is Total Customers Acquired
More Complex Customer Acquisition Formula:
Using this method of calculating your customer acquisition cost provides a more in-depth analysis of the costs involved in acquiring new customers.
CAC= MCC + S + EW + PS + O/ TCA
Where: CAC is Customer Acquired Cost
MCC is Marketing Campaign Costs
S is total cost of sales and marketing material (CRM, Print Materials, etc)
EW is the total cost of sales & marketing employee’s wages which is spent on getting new clients
PS is the total cost of any professional services you use for sales & marketing
O is any other overheads you use for sales & marketing’
TCA is total customers acquired.
Ok…. What’s the results of my check-up?
What’s a Good Customer Acquisition Cost?
Depending on your results the best way to analyse your CAC is to actually break it down into a ration of cost per customer like this. If the life time value (LTV) of your customer is lower than CAC, this is the same as getting a death sentence from your Dr. There may still be time to make some changes but it’s going to take a drastic turn around to save your organisation. I have outlined below what you should be aiming for and the actions you should take at each stage. Note that since delivery costs are so widely different, you’d better make sure they are out of your LTV first (not that it’s not part of any value, it’s all of the client value, but not much of your own).
Lower than 1:1 – A death sentence to your organisation. It’s going to take a drastic turn around to save the business.
1:1 – Not much better. The organisation is still losing money on every customer acquired. You absolutely have to be serious about making your conversions better.
2:1 – This is a better level but it doesn’t provide a good profit initially. Possibly look a cutting some costs without affecting customer acquisition and definitely work on how to get your conversions in your sales process up. Way up. And this is quite doable, we often see multipliers of difference when you runt through it all.
3:1 – This is widely regarded as the perfect level of LTV and CAC. This means you are spending the right amount of money to maximize profit and organisational growth. Provided there is growth to get, and you’re not in a laggard market. And still you could optimize even more.
4:1 – This is obviously fantastic! But you can be spending more also on traffic/initial contacts to grow faster. If you get to this level it may be time for you to begin some more advancing customer acquisition campaigns.
How Can you Reduce your Customer Acquisition Cost?
There is no magic bullet when trying to improve your CAC. However, there are a few tips I would highly recommend that you implement as quickly as possible to begin turning it around.
1. Use A CRM System (If you don’t already) or a Bulk-CRM if you have very many clients per sales representative
using a CRM system is the first step towards improving your sales process. A great CRM system can help you segment your contacts, follow them through their sales process and ensure they are receiving the right content at the right stage of their buying process. According to Aberdeen 75% of sales managers say that using a CRM system helps to drives sales and increase conversion. Combine this with the fact that 75% of businesses have no formal processes for lead nurturing, this is the most obvious place to start in Customer Acquisition Strategy.
2. Use Email Marketing & Marketing Automation
According to DMA, email marketing email marketing has a ROI (return on investment) of 3800% and marketing automation increased revenue of B2B companies by 60% to 1.2 million last year. The ability of email combined with marketing automation allows marketers to now reach the right prospects at the right time. Doing this allows for a much higher conversion rate, which leads to higher customer conversion. This is one of the fastest tricks used by head CAC consultants based in the USA.
3. Use Volley Marketing
Volley Marketing has only recently been launched as a fantastic way to turn your inbound website visitors into outbound marketing sales (hence the name). Using this allows you to set triggers on your own webpage according to who you are trying to reach (industry, title, etc) and have them automatically placed in your CRM system via IP address tracking. The video below shows how easy it is to reach your specific target segment.
Time for you to go for a check-up
It’s time for you to figure out your own CAC and start asking yourself the hard questions. I hope that the health check up only brings you good news and you can give your organisation the stamp of health. However, if not, don’t ignore it. Begin taking the first steps to improvement and use this as fresh motivation to take on the new year and make it your organisation’s best year yet!
If you’d like to have an on-line calculator of your CAC, it’s even included in the 2-min-test together with the hints from Forrester, Gartner and other research organisations how much it can be improved. You’ll find it at: