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.
At a glance: Customer acquisition tactics to try
- Get to know your customers
- Calculate your customer lifetime value
- Choose your marketing channels and strategies
- Leverage automation
- Assess and iterate
Overview: What is customer acquisition?
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.
What is customer acquisition cost?
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.
How to develop a customer acquisition strategy
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 5 steps to help you get started building your own customer acquisition strategy.
Step 1: Get to know your customers
Knowing your customer is the cornerstone of B2B marketing strategies and B2C marketing strategies alike. Your sales tactics won’t work well if you don’t understand who you’re selling to.
Therefore, it makes sense that understanding who your customers are, what problems they have, where they look for solutions, and how your product or service fits in is an important part of effective acquisition marketing.
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.
Tips for getting to know your customers
- Know what social media platforms your customers use: Social media is effectively a must for marketers today, but where should you focus? Simply put, focus on the platforms your customers frequent the most.
- Know when and where to have an “offline” presence as well: While online presence is important, traditional marketing tools can be effective as well. Depending on your product and target market, a well-placed billboard or magazine ad can have great return on investment (ROI).
- Referral programs can be a win/win: Referral programs can help incentivize your customers to be brand advocates. Additionally, they can help you learn which customers are most likely to spread the word about your product.
Step 2: Calculate your customer lifetime value
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:
- If CLV ÷ CAC is less than one, you’re losing value with each customer
- If CLV ÷ CAC is equal to one, you’re simply breaking even on cost of goods sold
- If CLV ÷ CAC is greater than one, you’re adding value to your business with each customer you acquire
Tips for calculating customer lifetime value
- Use realistic inputs: If you’re in the early stages of your business, chances are you’ll need to predict CLV figures. Be realistic but slightly conservative in your estimates.
- Aim for a CLV to CAC ratio of about three: Obviously, a CLV to CAC ratio of one or less doesn’t suggest you have a profitable model. But what should you aim for? Generally, a CLV to CAC ratio of about three is considered “good”, while a ratio of about five-six or higher can suggest you aren’t spending enough on marketing.
Step 3: Choose your marketing channels & strategies
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:
- Social media marketing: A presence on social media is one of the more cost-effective ways to build brand awareness and directly engage with your customers. With social media becoming a common post-sales customer service tool, it’s also an important part of customer retention, which can drive up CLV.
- Content marketing and SEO: Having relevant content online that your users can easily find is an excellent way to build your sales pipeline. As a result, content marketing and search engine optimization (SEO) are a popular customer acquisition marketing strategy.
- Email marketing: Targeted email blasts can have excellent ROI. With the right software, email marketing is also simple to scale. For example, Pipedrive is an affordable and easy to use CRM software that supports sending automatic emails based on specific workflows.
- Offline marketing: In the digital age, it can be easy to overlook “traditional” marketing like billboards, print ads, radio commercials, and direct mail. However, for many businesses these channels can have great ROI. Even digital businesses like Spotify have had success with offline marketing. According to the website Thenextweb.com, the music streaming giant’s 2016 campaign that commented on the listening habits of users drew attention to the brand and got a laugh or two along the way.
As you build your acquisition marketing plan, it is important to remember the different stages of the customer journey.
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.
Tips for choosing your marketing channels and strategies
- Track the effectiveness of marketing campaigns: You need to learn what works and what doesn’t to become efficient with your marketing spend. For email campaigns, software makes this simple. For example, HubSpot CRM makes it simple to track click rate, open rate, and bounces. For offline campaigns, it becomes trickier, but coupon codes and QR codes can help.
- Promote content from your users: Get your users to share content on social media. User-generated content (UGC) is a great way to build brand loyalty and benefit from network effects. Just how effective can user-generated content be? PepsiCo-owned Lay’s “Do Us A Flavor” campaign was credited with over 1 billion Facebook impressions and a 12% increase in sales.
Step 4: Leverage automation
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.
Tips for leveraging automation
- Make your automated content targeted: Automated content doesn’t have to be overly generic. By creating well-thought-out workflows and templates, you can make your automated content compelling and engaging.
- Give users a way to opt out of automated emails: In many areas, including the United States and European Union, there is legislation requiring businesses to offer users a way to opt out. As a result, your goals should be to create content relevant enough that your readers don’t want to opt out while also making it easy for them to do so if they want to.
Step 5: Assess and iterate
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.
Tips for assessing and iterating
- Find ways to attribute customer acquisition to specific channels: Google Analytics, QR codes, coupon codes, and links using UTMs (Urchin Tracking Modules) are just a few ways to track where your customers are coming from. Use this data to figure out what’s working and what isn’t.
- A/B test regularly: There are a ton of variables that come into play when considering the success of a given campaign. A/B testing lets you control many of those variables and see which approaches work better.
Profitable customer acquisition makes your business scalable
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.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Amazon, HubSpot, Netflix, Salesforce.com, and Spotify Technology. The Motley Fool has a disclosure policy.