{"id":16312,"date":"2022-10-12T08:42:56","date_gmt":"2022-10-12T13:42:56","guid":{"rendered":"https:\/\/www.invespcro.com\/blog\/?p=16312"},"modified":"2022-10-12T08:42:56","modified_gmt":"2022-10-12T13:42:56","slug":"bringing-down-customer-acquisition-cost-how-cro-helps","status":"publish","type":"post","link":"https:\/\/www.invespcro.com\/blog\/bringing-down-customer-acquisition-cost-how-cro-helps\/","title":{"rendered":"Bringing Down Customer Acquisition Cost: How CRO Helps"},"content":{"rendered":"Reading Time: <\/span> 10<\/span> minutes<\/span><\/span>

More customers.<\/span><\/p>\n

This is what every eCommerce business wants, and the reason is simple.\u00a0<\/span><\/p>\n

The more paying customers a business gets, the more revenue and profit they stand to make.<\/span><\/p>\n

But the issue is getting more customers isn\u2019t always linear. There\u2019s a lot that goes into customer acquisition strategy. And it\u2019s critical \u2013 if you want to be profitable\u2013 to ensure that your acquisition cost is lower than the customer lifetime value (CLV).\u00a0<\/span><\/p>\n

A sustainable business should have a CLV to CAC ratio of 3:1. This means that for every dollar you spend acquiring customers, you should get three dollars back.\u00a0<\/span><\/p>\n

With that said, how do you reduce your CAC to ensure profitability? Well, many strategies are proposed all over the internet. But not all of them are effective.\u00a0<\/span><\/p>\n

In this article, we will focus on one tried-and-tested method of reducing CAC. And that method is called <\/span>Conversion Rate Optimization<\/span><\/a>. We\u2019ve used this method over the years to help ecommerce companies bring down their customer acquisition costs \u2013 and in this article, we\u2019re going to show how we exactly did that.\u00a0\u00a0<\/span><\/p>\n

But before we delve into that, let\u2019s start by looking at what customer acquisition cost is, how to calculate it, and what\u2019s the industry average for e-commerce businesses.\u00a0<\/span><\/p>\n

What is Customer Acquisition Cost, and how to Calculate it?<\/b><\/h2>\n

Customer acquisition cost, also known as CAC, is the amount a business spends to get a new customer.\u00a0<\/span><\/p>\n

To calculate CAC, you need to add up the costs associated with getting new customers over a period of time, and divide that figure by the number of customers you got in that period of time.<\/span><\/p>\n

For instance, if you spend $10 on an advertising campaign and you get five new customers through that campaign. Your CAC is $2.\u00a0<\/span><\/p>\n

CAC = Cost of Sales + Cost of Marketing \/ New customers acquired<\/b>\u00a0<\/span><\/p>\n

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This formula is simple and direct, but when calculating it, make sure to add marketing and sales expense.\u00a0<\/span><\/p>\n

Some expenses might be obvious, others not too noticeable. Listed below are some expenses to include.<\/span><\/p>\n

1. Employee salaries.<\/span><\/p>\n

2. Tech stack costs.<\/span><\/p>\n

3. Ad spend.<\/span><\/p>\n

4. Content production cost<\/span><\/p>\n

5. Inventory maintenance cost.<\/span><\/p>\n

How Does Customer Lifetime Value Impacts Customer Acquisition Cost?<\/b><\/h2>\n

Customer lifetime value, aka CLV, is a metric that measures how much revenue you\u2019ll make from a customer for as long as they purchase from you.<\/span><\/p>\n

To get a good insight into your overall business health, it\u2019s good to know the ratio of customer lifetime value to customer acquisition costs.<\/span><\/p>\n

If your business runs a subscription plan, the lifetime value of your subscribed customers will give your CAC a good boost.<\/span><\/p>\n

Professional tip:<\/strong> if you don\u2019t offer subscription plans, consider a loyalty program, it\u2019s also a great way to retain customers for long.<\/span><\/p>\n

Here\u2019s a scenario to consider:<\/span><\/p>\n

Assuming your CAC is $150 per customer, and you get 3000 customers in a fiscal year, your total expenditure will be – $450,000.<\/span><\/p>\n

However, if each of these customers stays with your business for three years and spends $50 with you monthly, the LTV of each customer will be – $1650.<\/span><\/p>\n

$50 per month x 36 months = $1800<\/i><\/b><\/p>\n

$1800 \u2013 $150 CAC = $1650<\/i><\/b><\/p>\n

Multiply that figure by your 3,000 customers, and you get $4,950,000.<\/i><\/b><\/p>\n

Looking at the figure of $4,950,000, this is way more than the costs of acquiring new customers.<\/span><\/p>\n

To calculate LTV – average revenue per customer\/churn<\/strong>.<\/span><\/p>\n

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As mentioned in the intro, to have a healthy business, you should always ensure that your CAC is lower than LTV. The ideal ratio of LTV to CAC should be 3:1.\u00a0<\/span><\/p>\n

To calculate this ratio, divide the LTV by CAC and simplify it in its lowest terms.<\/span><\/p>\n

What is A Good Customer Acquisition Cost?<\/b><\/h2>\n

Average customer acquisition cost varies from industry to industry. To define a good CAC, you must identify the space you\u2019re playing in.\u00a0<\/span><\/p>\n

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According to Propeller<\/span><\/a>, these are the CAC average across different industries;<\/span><\/p>\n