This blog was written from episodes 75 & 76 of the Business by the Numbers Podcast, click here to listen instead!
Today, we explore the world of customer acquisition cost and how it influences your business’s marketing efforts. Understanding the cost of acquiring new customers is crucial for any company seeking sustainable growth and profitability. In this post, we’ll delve into key concepts and strategies to help you calculate customer acquisition cost effectively, identify your target audience, optimize your advertising campaigns, and figure out how to determine what the right CAC should be for your shop. Let’s get started!
Part 1: What is Customer Acquisition Cost?
Defining the A+ Customer
The first step in understanding customer acquisition cost is recognizing the value of an A+ customer. These are the customers who not only make significant purchases but also remain loyal to your brand. Identifying your ideal customer persona helps you tailor your marketing efforts to attract more of these high-value customers.
Factors that can influence customer acquisition cost include:
Purchase Frequency: How often do A+ customers make repeat purchases?
Customer Lifetime Value (CLV): How much revenue can you expect from a single A+ customer over their lifetime? These are the people that will come into your shop for their cars, for their kids cars, and get their friends to bring their cars because they both believe in and advocate for your shop. They trust and spend money with you for the big and small work that needs to be done. This advocation is Referral Potential, which will expand you’re A+ customer base even further. By honing in on your A+ customer characteristics, you can fine-tune your marketing messages and channels to attract similar prospects while optimizing your customer acquisition cost.
Balancing Good, Fast, and Cheap Advertising
When it comes to advertising, the age-old saying “good, fast, or cheap – pick two” holds true. Understanding this concept helps you make informed decisions about the type of advertising that aligns best with your business goals and budget.
- Good: High-quality advertising often requires a larger investment. However, it can yield better results and create a positive brand image among your target audience.
- Fast: Quick results may come at a higher cost, especially for short-term marketing campaigns. Fast advertising can be ideal for time-sensitive promotions or if you know you needed 50 new customers yesterday.
- Cheap: Lower-cost advertising options might not deliver instant outcomes, but they can be sustainable in the long run, particularly for businesses with limited budgets. However, bear in mind that although something may not cost much, it very well might hone in on your A+ customers.
Evaluate your marketing objectives, budget constraints, and time frame to determine which combination of “good, fast, or cheap” suits your advertising strategy best. Bear in mind that advertising and marketing are not an exact science. This requires trial and error and at it’s best, all the data in the world of marketing is still an educated guess.
The Power of Source Reporting
Source reporting is a critical aspect of any advertising campaign. It involves tracking and analyzing the performance of various advertising sources (e.g., social media, search engines, email marketing) to measure their effectiveness.
Accurate source reporting provides essential insights into:
- Which advertising channels are driving the most valuable customers to your business.
- Which channels are not generating a positive return on investment (ROI).
- How to allocate your marketing budget wisely for optimal results.
By leveraging source reporting, you can allocate your ad spending to the most effective channels and refine your marketing strategies continually.
Part 2 How to determine a reasonable CAC for your shop
One of the primary concerns for businesses is determining an appropriate Customer Acquisition Cost. There is no one-size-fits-all answer, but several essential factors can guide your decision:
Advertising Spend as a Percentage of Sales: Many successful businesses allocate around 6% of their sales for advertising purposes. This can serve as a benchmark for your CAC budget. Paar Melis and Associates has been working on a benchmark report (check out episode 49 of business by the numbers) that spans a range of different shops across the country that is pending release.
Word of Mouth and Reputation: Long-standing businesses that have built a loyal customer base through word-of-mouth referrals may naturally have a lower acquisition cost. Satisfied customers become your brand advocates, bringing in new customers free of cost.
Location and Visibility: Physical presence and easy accessibility can attract customers without extensive advertising efforts. On the contrary, businesses located far from the main road might require higher advertising investments.
Competition: The level of competition in your area directly impacts CAC. If your business faces minimal competition, customers may naturally gravitate towards you, reducing the need for extensive advertising.
Sales Growth Timeline: The speed at which you aim to ramp up your sales also affects CAC. As mentioned earlier when relating to “good, fast, or cheap,” If you desire rapid growth in a short time, be prepared to allocate a higher budget for customer acquisition.
“Factors like demand, word of mouth, competition, and your growth timeline all play significant roles in determining a good CAC (Customer Acquisition Cost) for your unique business.”
ARO – Putting Gross Profit into Perspective:
Average Repair Order (ARO) is a crucial metric that sheds light on how much you’re spending. By comparing ARO to CAC, you can gain valuable insights:
Differing CAC between Shops: Different types of businesses have varied profit margins, leading to distinct CAC requirements. For example, a Quick Lube shop may have a lower ARO and a smaller margin per visit compared to an exotic car repair shop.
Appropriateness of CAC for Different Businesses: A $100 CAC might work wonders for an exotic shop with higher profits per visit. However, for a Quick Lube shop with lower profits, a $100 CAC might not be feasible.
Balancing Customer Retention: Sometimes, businesses may attract numerous customers with low CAC but struggle to retain them. An example of this was when shops were using Groupon to offer discounted oil changes, attracting one-time customers with little chance of repeat business.
Customer Loyalty and Lifetime Value:
We talked a little about this earlier, but it bears more exploration, considering that customer loyalty is crucial when evaluating CAC:
Lifetime Customer Value: Look beyond immediate gains and assess how much a customer is likely to spend over their entire relationship with your business. Investing in acquiring loyal customers with high lifetime value can justify higher CAC.
Example: Assessing an AC Machine Sale: If you spent $500 to acquire a customer who purchased an AC machine for $500, the immediate profit may seem lacking. However, if this customer returns regularly for maintenance and additional services, the lifetime value justifies the initial acquisition cost.
Your business’s capacity, both in terms of personnel and physical space, should be factored into your CAC strategy. If you’re nearing full capacity, it may not be wise to invest heavily in CAC, as you might struggle to accommodate an influx of new customers. Conversely, if you have ample space to grow, increasing your advertising budget can help ramp up your customer base.
Unveiling the True Customer Acquisition Cost:
It’s not enough to calculate CAC; determining the True Customer Acquisition Cost is equally vital. This involves considering customer retention rates and loyalty. Businesses that prioritize exceptional customer service and build strong relationships are likely to have lower True CAC, as satisfied customers become returning patrons and brand advocates.
In conclusion, Customer Acquisition Cost is a critical metric that can make or break business success. By analyzing factors such as advertising spend, competition, customer loyalty, and growth goals, you can determine a suitable CAC budget tailored to your business needs. Strive for the True Customer Acquisition Cost, where happy customers translate into lasting growth and reduced advertising expenses. Embrace this analytical approach to drive your business forward, ensuring you reach your desired destination with confidence and success.