How to lower your Customer Acquisition Cost

How to lower your Customer Acquisition Cost

You can’t be an entrepreneur without a healthy streak of optimism. There’s just no way you can survive the gruelling task of trying to convince yourself and investors to believe in a dream while shrugging off a steady stream of rejection.

But while optimism might be a crucial personality trait for entrepreneurs, it’s often accompanied by self delusion lurking nearby in the bushes. This could mean convincing yourself of product/market fit when there isn’t one, or forecasting an unrealistic CAC (Customer Acquisition Cost).

I’ve seen many startups solve the product/market fit problem, only to fail when the cost of acquiring and monetizing customers turns out to be higher than expected. Previously, I’ve talked about how to balance CAC with Customer Lifetime Value (LTV), but I didn’t go into the gory details of how a crafty entrepreneur goes about keeping CAC low. 

 

“Go viral, make lots of money” isn’t a plan

If you want to build a successful business, your LTV needs to be greater than your CAC by a ratio of about 3:1. This is the sweet spot. When you first start out, you can expect this ratio to be more like 1:1, but if you can’t move that to 2:1 and eventually 3:1, you won’t last long.

Viral growth has become the holy grail for entrepreneurs, but it’s not enough to simply hope that your business will go viral. I can’t tell you how many pitches I’ve heard where this was part of the marketing plan.

I’m here to tell you a hard truth: “Go viral, make lots of money” is not a plan.

To actually understand how viral works, you need to wrap your head around growth-hacking strategies that have turned the traditional approach to sales on its head.

 

Embrace inbound marketing

Inbound marketing, at least in its current incarnation, is a relatively new phenomenon. Traditionally, marketing used to be about having to go out and get customers. This was done through paid ads, cold calling, flyers, catalogues, spam — anything you had to pay for to get a potential customer’s attention.

But today, inbound marketing is about creating content, both useful and compelling, that accurately represents what your brand is all about, and draws in those people who are most likely to become future customers.

Sometimes the content is about product — but, more often than not, it isn’t. It might simply be interesting  or informative content related to the industry, or in the case of B2C businesses, it might just be fun. The important thing is that the content you create is highly shareable and it makes you look like a thought leader or arbiter of cool. This low-touch approach takes pressure off of customers to convert and lets them decide to enter the sales funnel when they’re ready.

 

Leverage social networks

With inbound marketing, you are attracting potential customers to your blog or social media accounts by creating great content. If what you are creating is good enough, people will share it. Why people share content is a field of study unto itself, but if you distill it down to the core motivation, we share to either inform or entertain those in our network. This could be entirely altruistic, born out of self interest, or a little of both, but that doesn’t matter to you. What matters is that you are leveraging the power of the crowd to get your name out there.

But this isn’t just about people sharing blog posts or tweets. Depending upon the product or service you’re offering, you can turn customers into agents who can help you make a sale by inviting people in their network to try it out. This can be an incredibly effective way to pull potential customers into your sales funnel.

 

Offering free products or services

Free is changing everything. Whether you are trying to attract visitors directly, or create an incentive for existing customers to invite people in their network to check your business out, offering a free product or service is a time tested method for getting the word out.

The trick is in figuring out what you will monetize around that free product:

  • Is it an old-school “first one is free” offering?
  • Is it a free trial?
  • Is the free product merely a stripped-down version of a product that allows people to try it out and hopefully convert to a premium paid version?
  • Or will it always be free, and you’ll monetize in some other way?

 

SEO vs. SEM

Making your website easy to find just makes sense. The higher your search ranking, the more traffic you get. The more traffic you get, the greater the chance you can engage potential customers. There are a few ways you can do this. You can pay for SEM (Search Engine Marketing), which will increase your visibility via paid ads, and you can increase visibility via organic SEO (Search Engine Optimization).

Paying to play is fairly self explanatory, but the dark art of SEO can be tricky. You can do it manually, which can be outrageously expensive and time consuming. Or you can automate the process, which is considerably cheaper, but may yield lower quality backlinks.

 

Learn to love metrics

To understand what strategies work best for lowering your CAC, you’re going to have to learn to love metrics. Measure everything, such as:

How many customers are you adding each month?

  • Where are they coming from?
  • What product initiatives are working best?
  • Are freemium users converting to paid?
  • How much are they spending?

Find the right tools for gathering metrics, and learn how to use them.

 

Key takeaway

Having a great product/market fit is just half the battle. Nailing a LTV:CAC ratio of 3:1 is how you win it.

Joshua Bixby

Like most tech troublemakers, I’m a problem-solver who likes to explore new ideas and play devil’s advocate (not necessarily in that order).

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