Customer Acquisition Cost: What is it and why Does it Matter to Retailers?
A few months ago, my wife and I took our six-year-old to the local toy store for a free event that included giveaways, copious amounts of treats and all sorts of entertainment for children.
An event with the overall goal of attracting customers for life.
The little toy store was packed. It seemed that every kid was emerging with a new toy. The turnout was absolutely incredible and the store seemed to be reaping the benefits.
Regardless of the cost to the store, the experience provided the toy store with invaluable foot traffic and a chance to gain lifetime customers.
The toy store had the right idea: low customer acquisition costs with the overall goal of attracting customers for life.
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Old school customer acquisition
Getting traffic through the door is the key to creating a successful retail business, whether it’s getting found online or attracting new customers to your physical store. This might seem easy if you already have a great product or service, but in practice, this goal can be a bit more difficult to obtain.
The old adage about spending money to make money still rings true. In order to get foot traffic, it’s necessary to invest in methods that will attract and retain these customers, with the ultimate goal of increasing ROI.
This effort is generally known as Customer Acquisition Cost (CAC).
While it may seem counterintuitive, a new business will have a relatively easy time luring in new customers without burning through excessive amounts of money. Most businesses enjoy a period of relative prosperity when they’ve just set up shop, but soon enough the business can dry up without a CAC plan.
Regardless of your business model, it costs money to entice customers. This could be the toy store holding an in-store event, a clothing store featuring giveaways or a local watering hole offering a ladies night. The cost of the event is generally much less than the resulting sales.
How to calculate customer acquisition cost
CAC is relatively simple to calculate but can be difficult to quantify.
Begin by adding up your marketing expenses and dividing them by the number of new customers acquired through those means.
For example, if you spent $10,000 in marketing last month and you received 1,000 new customers as a direct result of your marketing efforts, then your CAC is $10.
The result is a number that will increase as your retail business becomes more and more successful. If this number becomes higher than your customer lifetime value (CLV), immediate adjustments need to be considered.
Obviously you want the cost of acquisition to be less than the value the customer brings to your business. The ratio should be around three to one—ideally, you should spend one dollar in order to bring in three dollars from each customer.
Sounds pretty simple, but the more your business grows, the more your CAC will increase.
Decreasing your customer acquisition cost
While spending can help with customer acquisition, one old, tried-and-true method can also be the most effective: customer service.
While customer service alone is not going to make your business stand out above the rest, it can be a sure-fire way to gain lifetime customers.
Many retail businesses focus on marketing as their main customer acquisition strategy and neglect the customer service aspect. Ask pretty much any retail store and they will tell you how incredible they are at meeting the needs of their customers—when in reality, they could use a little work.
Make it a priority to invest in customer service.
Some ways to improve your customer service include:
- Investing in employee training
- Opting for a point of sale system (POS) with mobile capabilities (this will help reduce wait times dramatically)
- Personalizing service (think customer loyalty programs)
Investing in customer service, whether that be training or a POS, should be included in your CAC budget.
Reviews can be a double-edged sword. We love them when they’re good, but they can make our lives extremely difficult when they’re not.
Reviews can bring in customers just as easily as they can scare away potential clients.
Needless to say, reviews can be extremely valuable for lowering your CAC as they have become one of the go-to ways to discover new businesses.
And the more reviews you have, the better—don’t sweat the negative reviews.
Many reviews are negative and that’s because when customers have a positive experience, they generally don’t let the world know. A negative experience is usually shouted from the rooftops. Take the time to respond to negative reviews. This will give you the chance to turn a negative experience into a positive one.
Pro tip: by asking for positive reviews when the customer is still riding high from the experience, you can amass a stockpile of great reviews.
Consumers love incentives.
Promotions, giveaways or loyalty programs all have the potential to increase customer engagement. If customers have the incentive to return over and over again, they are more likely to spend more over the lifetime of the relationship.
Everyone loves free stuff. Loyalty programs are a prime example of this type of marketing. For example, coffee shops are known for this type of marketing. Many of them offer loyalty programs that motivate customers to purchase coffee on a regular basis. With each purchase, the customer gets closer to the goal of getting a free coffee.
Lightspeed customer Chez Mère Grand uses Lightspeed Loyalty to create repeat customers
Next time the customer needs coffee they are going to return to the coffee shop that offers the incentive. This type of incentive-based marketing comes with an inherently low CAC and a high CLV.
Solve their problem
When you have a flat tire, you need a tire shop. If your watch battery dies, you need somewhere that replaces watch batteries and when your pregnant partner needs a bowl of ice cream, you find it at all costs.
Every consumer carries with them a problem to be solved, even if they don’t know they need a solution. It is up to you to figure out what that problem is and offer a solution. Retail businesses that understand this concept are the ones that are thriving.
By using data from your POS retail reports or even through your loyalty programs, you’ll be able to get a closer look at what your customers’ needs, wants and struggles are, and figure out how your business can cater to them.
This is truly the holy grail of decreasing your CAC and running a successful business. It is also the most difficult. Make it a priority to work with a POS that has an advanced analytics module to stay ahead of the game.
Customer acquisition matters
Back at the toy store…
After walking out with my son and his new stuffed animal in hand, I realized that the store had tapped into what would bring me back: they had made my son’s day. Next year, when the giant stuffed animals show up, I will be at the toy store, doing this again.
Companies that understand the drive behind their customer’s purchase and what that customer acquisition entails, are a step ahead in building long term strategies for their business and long term relationships with their customers.
I am confident that the toy store gained some lifetime customers on that day with minimal customer acquisition costs. Their return on investment was substantial due to the number of toys they sold. They figured out that parents have a tough time telling their kids “no” and that’s not going to change.
Well played little toy store, well played.