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Are your customers worth the amount of money you spend to get them? The way for you to find out is by calculating your customer acquisition cost (CAC).
What is Customer Acquisition Cost?
Your Customer Acquisition Cost is the total amount of money you spend to reel in a new customer.
It’s your total Sales and Marketing spend during a specific period to acquire a new customer.
Why is it important to know your acquisition cost?
If your Customer Acquisition Cost is too high, you’re in trouble. It reduces your profitability.
And if it’s higher than the revenue you expect to earn from your customers, you’re stuck bleeding money.
Consider your customer acquisition cost to be a reality check.
Many entrepreneurs are overconfident about their offerings and fail to realize how much effort and money it takes to get a customer.
How is customer acquisition cost calculated?
To get your Customer Acquisition Cost, you need to take your total marketing cost during a period, add it to your entire sales cost during that time, and divide it by the number of new customers you acquired in that time.
Here's the basic formula for you to calculate your Customer Acquisition cost:
There is one small caveat, though.
You only need to account for the marketing and sales costs that you dedicated to acquiring new customers. Your acquisition costs do not include the overhead costs and the expenses related to cross-selling or upselling because those activities are targeted towards your existing customers, trying to turn them into repeat customers or higher-value customers.
How do you know if you have an excellent CAC?
There are two ways to know where you have a healthy CAC.
Comparing it with your customer lifetime value
By looking at your customer acquisition cost alongside your customer lifetime value, you get to know whether it’s worth spending the money you’re paying to acquire your customers.
Your customer lifetime value should always be higher than your customer acquisition cost.
Ideally, your CLV: CAC ratio should be around 3:1.
Anything lower pretty much means that you’re wasting the money you’re spending on acquiring new customers. They aren’t worth it.
But, if your customer lifetime value is astronomically high, you might be missing out. That could mean that you’re not spending as much as you should on acquiring new customers.
It could mean that you’re holding yourself back.
Although it’s a good problem to have, it’s still a problem. You’d need to spend more money on marketing and sales initiatives that could help you grow your business further.
Comparing it with the industry average CAC
You may be feeling rather good about yourself until you realize that everyone else in your industry has a far better customer acquisition cost.
It sure is a wake-up call.
But the upside is that you get to see what everyone else in your industry is doing to optimize their CAC. Now you can take those strategies and tactics and apply them to your business.
Here’s the standard customer acquisition cost across twelve major industries:
How can you reduce your acquisition cost with bots and live chat?
The faster you respond to leads, the higher your conversion rates will rise. But if your agents have to get on calls with every single lead individually, you’re missing out. You need to add some form of marketing automation into the mix.
That’s where chatbots and live chat come in.
A bot doesn’t need to worry about handling one conversation at a time. It’s up for the challenge and can help you engage all your customers without delays.
Marketing automation software like chatbots give your agents more leeway. They get to handle the more complicated questions and use-cases in greater detail rather than rushing everything along. It makes your customers feel like you care about them and are here to help them succeed, rather than just hitting your targets.
But, you could scale up the conversations with live agents too.
While phone calls only permit your agents to converse with one prospect at a time, live chat solutions allow them to simultaneously handle multiple conversations.
It gives your customers the perfect combination of speed and personalization.
The Havard Business Review has shown that the average lead response time is 42 hours. That’s enough time for these leads to forget all about you. Let alone remember that they actually reached out to you.
And even if they do remember reaching out, they’re probably left feeling like you don’t think they’re important enough.
But other studies have shown that bringing that gap down to 5 minutes gives you a 21x growth in the number of qualified leads.
Imagine what could happen if you could reply instantly instead of making customers wait for 42 hours or even 5 minutes.
Chatbots give you the ability to do precisely that while reducing your costs.
Guess what you can expect if your customer journey has way too much friction.
That’s right — higher customer acquisition cost.
Chatbots and live chat can simplify the customer journey.
They can give your prospects all the information they need without forcing them to navigate your entire website.
They can even guide customers directly to the payments page.
But that’s not the only way in which they help you.
Engati's Live Chat even gives you valuable insights about your user journey on your website.
It shows you which page your visitors landed on, which pages they navigated through and which page they contacted you from.
This can help you understand which of your webpages are confusing — time to optimize them for clarity.
WhatsApp alone has over 65 billion messages sent over it daily.
People are comfortable using messaging apps. Bots and live chat empower you to engage with them right there, at scale, in a cost-effective manner.
It allows you to reach your customers and drive sales without forcing them to switch to another application.
Even your Facebook Ads can play in here, with CTAs that encourage leads to engage with your business right over Messenger. And you can be sure to reply to them instantly, thanks to your trusty bot.
Even if they chose to reach out to you over another app later, your live chat agents would still have context. They can manage all their customer conversations across every single channel in a one-view inbox. They can even stitch these conversations together so that your customers never need to repeat a response.
Generic product recommendations aren’t practical. They’re essentially a waste of money.
You need to lure prospects in by offering them the products and services that they want.
Chatbots refer to past conversations with a particular user to deliver personalized recommendations. This increases the effectiveness of the marketing message.
It reduces the amount of money wasted on generic, ineffective messages.
Blibli, one of Indonesia’s largest e-commerce stores, uses an Engati chatbot to provide personalized product recommendations and drive sales right over Messenger.
Chatbots and live chat can help you get into your customers’ minds. They allow you to collect feedback and understand the Voice of the Customer.
Engati’s dashboards give you an in-depth understanding of your customers’ behavior while engaging with you. It helps you understand what most of your customers expect from you.
But, Engati even helps you collect actual feedback.
The Feedback Node allows you to collect ratings. It even helps you make things more interactive by using stars and emojis.
You even get to decide which scale works best for your business.
If you need detailed feedback, your live agents can ask your customers about their expectations and pain-points. They can even ask your customers what they love the most about your business.
Now you get to improve your offerings and your marketing strategies, optimizing your acquisition spend.
Chatbots and live chat help you improve your customer experience dramatically.
While other companies make them wait for a day to get a response to their emails, your customers will get instant replies to their messages.
That means that your customers are going to talk about you. They’re going to tell their family and friends how easy it is to do business with you. They’ll talk about how you’re there to answer all their questions and solve all their doubts 24/7.
Your customers will be marketing your business for free.
You can get started with automating your customer engagements right now at no cost.
Try Engati’s chatbot and live chat solution for free today!