Discussion of the Customer Acquisition Cost has come up several times within my earshot recently. It’s one of the latest buzzwords going around… and (semi)-justifiably so. If you don’t know your acquisition cost (and average customer lifetime value) , it can be difficult to make decisions about your marketing campaigns.
But here’s the thing that was totally missing from all of those conversations: it is almost always cheaper to retain a customer you have than to go find a new one. Although ‘getting xx number of new customers’ is a fun statistic, if you want your marketing dollars to work most efficiently, you’ll shift your focus to making the customers you already have, happy.
Let’s chat about that… and I have a juicy example of a company that’s wasting a lot of ad dollars!
What is Customer Acquisition Cost?
Put simply, the cost to acquire a customer (gah! It even has an acronym: CAC) is the cost of your marketing efforts, divided by the number of new customers you attract. Paired with the Average Lifetime Customer Value (which is how much money the average customer spends with your company before moving on) can be a great metric to help guide your marketing costs.
For example, let’s say you are a plumber, and your average appointment nets $200. You can then feel much more justified spending $20 in Google Ads to acquire a new customer.
If you sell a subscription service and have figured out that the average customer stays enrolled in your service for a full year, you may decide that it’s worth spending the full first month’s payment as a customer acquisition cost, since you know most customers will stay around for another 11.
Makes sense, right? But it’s only part of the marketing puzzle.
How does Customer Retention fit in?
Maintaining customers takes a certain amount of work and resources, just as acquiring one does. For example, you may need to dedicate customer service hours to a customer who is having trouble with a product. You may need to replace a lost shipment in the mail. You may spend money mailing out postcards/coupons to encourage customers to return. Or pop a fun ‘extra’ in when you ship an order. This work (and expense) to keep a customer coming back to you is the cost of customer retention.
Here’s the thing: a customer who has a history of making purchases from you is far more valuable than a first-time-visitor to your site. They’ve already looked at your website and decided that they like your product. It is easier (and cheaper!) to make that customer happy than it is to go find a new customer (5 times cheaper). It’s why so many companies put so much effort into reward programs and incentives to keep customers coming back!
The high value of a customer you already have is something worth keeping in mind as you consider your customer service policies. I’m a total nut about customer service (see my webinar on providing amazing customer service from Craft Industry Alliance), because I believe that making someone happy is usually more about lending a listening ear and a moment of thought rather than big bucks and epic marketing campaigns.
We all encounter customers who are just cranky enough to rub us the wrong way. But before you ‘fire’ a customer by failing to meet their (perhaps, unreasonable) expectations, take a moment to consider acquisition cost. Is it cheaper to meet an existing customer’s need rather than acquire a new one? More times than you may think, the answer is ‘absolutely, yes’.
Misplaced Marketing Dollars: a company overly-focused on acquisition
Last year, I had oodles of tasks on my plate and I was feeling stretched thin. As I was thinking of tasks that I could off-load, I heard about a cleaning service that you could schedule through an app. It wasn’t cheap, but it was easy-to-schedule and it was a solution that came at just the right time in my life.
The cleaner that I booked through the app always came on time and did a good job. The 2.5-hour cleaning session was billed directly to my credit card, which I’m always a fan of. However, the cleaner habitually left 15 or more minutes early, despite my conversational attempts to confirm the length of the appointment (I was usually on a conference call during the final hour, when she left).
As I evaluated the service, I decided that I wasn’t getting my desired value, as there were unfinished tasks and the cleaner kept ducking out. And the app provided no place to leave this type of specific feedback.
When I unsubscribed from the service, a final comment box said, “Anything we could do better? Every comment goes directly to the CEO for review”. I seriously thought, “Phew! Finally a chance to talk to a person!”. And to be completely honest with you, if a customer service person had replied and said, “We’re so sorry. That’s not how we operate. We’re going to assign you to a different cleaner”, I would have promptly renewed my subscription.
But I never received a reply. The company doesn’t spend much effort on customer retention.
Since then, I’ve received no less than 3 flyers printed on very lush cardstock on the gate of my apartment. This company, that doesn’t spend 5 minutes replying to a customer issue, spends hundreds (probably thousands) of dollars to print high-quality materials and pays a person to walk around my neighborhood putting flyers on every door. They’re spending lots of money on customer acquisition.
A shift in priorities may help improve their bottom line.