5 Things You Should Know About Customer Acquisition Cost

Lisa Hotchkiss at NICE CXone shares insights on the five things every contact centre leader should know about customer acquisition cost.

By now, contact centre leaders are well aware of the impact great CX has on customer loyalty. Providing satisfying customer service experiences can build strong relationships that lead to lower churn and can turn happy customers into brand advocates.

Taking care of customers is as important as ever these days because their expectations are increasing, and loyalty can be fleeting. As the late US football coach Vince Lombardi said, “It takes months to find a customer… seconds to lose one.”

Which brings up the topic of this post—the time, effort, and resources it takes to find new customers. Savvy businesses measure customer acquisition costs (CAC) to understand the amount of money they need to invest to attract new customers.

They use this information to make informed decisions about sales and marketing activities.

Contact centres factor into customer acquisition costs both directly and indirectly.

It’s easy to see how outbound, sales-focused contact centres might be included in CAC calculations, but it might surprise you that taking care of existing customers and gaining more revenue from them also impacts these costs.

The cost of acquisition and the value of a lifetime customer are closely intertwined, and contact centres play a vital role in ensuring the economics make business sense.

What Is Customer Acquisition Cost?

Customer acquisition cost is a business metric that measures how much money marketing and sales need to spend to gain a new customer during a given time period.

It’s important for businesses to track CAC because it lets them determine if the cost of acquiring a new customer makes fiscal sense when compared to how much revenue is expected from that customer.

By using customer acquisition costs, businesses can make data-driven decisions about which sales and marketing methods will provide the highest return on investment.

For example, CAC can be calculated by marketing channels, such as Facebook ads, email campaigns, and TV commercials. Analysing CAC allows organizations to identify the most efficient method of acquiring new customers and can be used to make decisions about allocating funds.

Average customer acquisition cost varies widely across industries. For example, average CAC is $10 for retailers by one estimate, while banking and insurance providers come in a little over $300 (just think of all those Progressive and Liberty Mutual TV commercials!).

CAC can also be quite different for companies at different maturity levels.

For example, startups may have high customer acquisition costs as they try to build a customer base to fuel their growth, whereas established businesses may already have a good sales pipeline and don’t need to spend as much on marketing.

How Do You Calculate Customer Acquisition Cost?

The formula is very straightforward. First, you choose a time period that you want to measure, for example, the year 2020. Then you add up all the sales and marketing costs incurred in 2020 and divide it by the total new customers acquired during 2020.

CAC =	(Total Marketing Expenses + Total Sales Expenses)
	# of New Customers Acquired

As a very simple example, if your 2020 sales and marketing costs were $30k and you gained 600 new customers, your customer acquisition cost for 2020 was $50 ($30,000 / 600).

In other words, each new customer costs $50 to acquire. How do you know if that’s good or bad? You need to compare it to expected revenue, which will be discussed in the next section.

For now, let’s talk about what’s included in “sales and marketing” costs. This category typically includes expenses such as:

• Sales and marketing employee salaries, commissions, and benefits
• Technology, like customer relationship management (CRM) software, used by sales and marketing staff
• Ad agency charges
• Creative design and content development
• Event and/or webinar costs targeting prospects
• Publishing costs, including air time for TV commercials and ad charges from social media companies

The CAC calculation needs to be as accurate as possible, so any expense associated with gaining new customers should be included.

What about contact centre expenses?

If a centre provides sales support, expenses related to sales should also be included. “Sales support” can range from inbound operations that take orders to outbound call centres that are dedicated to lead generation or sales.

Contact centre cost categories that would be included in the CAC calculation could include all or a portion of the following:

• Agent, supervisor, and support staff wages and benefits
• Facilities costs
• Software costs
• Telecom costs

If the contact centre is strictly dedicated to sales—for example, an outbound call centre that only handles lead qualification—determining what costs to include in the customer acquisition cost equation is very straightforward.

It’s likely that all of the call centre expenses can be included.

It’s trickier when the contact centre handles a mix of interactions that includes sales as well as other contact types, like service and claims.

In this situation, the organization needs to first identify the number and length of sales calls the contact centre handles from prospective customers, and then identify a way to allocate costs to those calls.

For example, costs could be allocated based on the percentage of calls or talk minutes represented by those prospective customer sales calls.

Allocating contact centre costs to customer acquisition can take some time, but it’s worth it if it will result in a more accurate CAC calculation.

The Relationship Between Customer Acquisition Cost and Customer Lifetime Value

Once you calculate your customer acquisition cost, what then? How do know if your CAC is within an acceptable range?

You could benchmark it with industry standards for a start. This will tell you if you’re in the same ballpark as your competitors. But ultimately you need to compare your CAC to customer lifetime value (CLV) so that you’ll know if the money you need to spend to gain a new customer is worth it.

Customer lifetime value is a measure of how much an average customer will spend on a company’s products or services for the duration of the relationship.

For example, if the average customer spends $25 a year and the average tenure of a relationship with a business is 2 years, the CLV is $50 ($25 x 2).

If you compare this to the $50 CAC we calculated earlier, it becomes apparent that the CAC is much too high. Spending $50 to acquire a customer who only generates $50 in two years in gross revenue just doesn’t make business sense.

This comparison of CAC to CLV is known as the CLV:CAC ratio, and it’s a crucial comparison to run if you want to know if the projected value of new customers is worth the price of acquiring them.

As a rule of thumb, businesses should aim for a 3:1 CLV to CAC Ratio.

In our example, this could mean that if the CLV was $150, a $50 CAC would be perfectly acceptable. Anything less than a 3:1 ratio might not be financially sustainable.

Businesses with low ratios need to reduce CAC, increase CLV, or both. Ratios much higher than 3:1 could indicate an opportunity to increase sales and marketing efforts.

Now that you know the relationship between customer acquisition cost and customer lifetime value, let’s talk about how contact centres can positively impact both measures.

5 Things Contact Centre Leaders Should Know About CAC

Hopefully, you have found this discussion to be helpful for understanding CAC better. But let’s shift the conversation to what this means for contact centres. Here are five things to know.

1. Inbound Conversion Rates Are Essential for Reducing CAC

If you work at an inbound contact centre that takes customer orders, you likely know that conversion rates are important. But hopefully, the previous discussion has helped you think of contact centre conversion rates at a more macro level.

Every prospect you convert to a paying customer lowers your organization’s customer acquisition cost, which in turn makes your company more financially healthy.

How does it do that? Recall the CAC equation: Sales and Marketing Costs / Number of New Customers.

Increasing the conversion rate doesn’t change the numerator but it directly impacts the denominator. Every new customer your contact centre adds to the equation chips away at the CAC, making your company’s marketing efforts more productive and ultimately impacting the bottom line.

Your agents play a key role in increasing conversion rates. Do they view themselves as passive order takers or proactive salespeople? If agents are helping callers place orders, they need to have basic sales skills.

They need to know how to identify needs, provide solutions, recommend additional items without being too pushy, and close the sale. Some prospects just need a little nudge from an agent with sales skills to get them off the fence and converted to a sale.

This means, of course, that agents need sales training and perhaps some incentives to provide extra motivation. They also need good technical tools—for example, a unified agent desktop that can integrate with CRM software—so they can personalize interactions and offers.

2. An Industry-Leading Predictive Dialler Can Optimize Your Outbound Campaign Results

If you run outbound campaigns, then you know the first step in making a sale or qualifying a lead is getting a hold of a prospect. High connection rates give agents more opportunities to close sales and decrease customer acquisition costs.

But are you using the best dialler for the job? Industry-leading diallers empower contact centres by letting them choose the right dialling strategy for each outbound campaign.

For example, if the software has predictive dialler capabilities, it can ensure agents are fed a steady stream of leads by using variables such as connect rates, average talk time, after-call work as well as agent availability and abandon rates.

The dialler will constantly monitor all those statistics and adjust the dialling algorithm throughout the campaign.

This allows the predictive dialler to simultaneously dial multiple calls for each agent. For higher-touch sales processes, the best diallers can switch to preview dialling mode or even manual dialling.

But to really connect with the most leads (and reduce CAC), you need a dialler that eliminates the tell-tale pause at the beginning of outbound calls, so prospects don’t hang up before agents have an opportunity to engage with them.

Every person that hangs up when they hear that pause represents a missed sales opportunity and can negatively impact your CAC.

3. Great CX Creates Promoters

Did you know that one of the most effective ways to gain new customers is to have another customer refer them to your brand? A referral from a trusted source is more effective than most forms of marketing.

And it doesn’t cost businesses anything! Imagine what that will do for your CAC!

Okay, it isn’t quite accurate to say there isn’t any “cost.” The price of admission is consistently satisfying CX.

Organizations that are able to provide exceptional customer experiences will foster loyal, long-lasting relationships that turn a high percentage of customers into brand advocates who are more likely to refer friends and family.

These brand advocates are also known as Promoters, which is a label based on Net Promoter Score (NPS). Net Promoter surveys ask customers how likely they are to recommend a brand to friends and colleagues.

Those who are highly likely are called Promoters. Not only do Promoters refer people at higher rates than non-Promoters, but they also purchase more frequently and have longer relationships, meaning they have higher CLV. In a nutshell, Promoters are great for business.

Contact centres have the ability to increase the number of Promoters they have by always providing great CX.

Going the extra mile to solve a customer’s problem can turn even the most cynical Detractor into a Promoter. Soon, they’ll be writing glowing product reviews and gushing about your business on Facebook or Twitter!

To measure the percentage of Promoters and Detractors, periodically survey your customers to determine NPS. Then use the results to make your CX even better and turn more customers into referral machines. This will result in a lower customer acquisition cost and higher profitability.

4. Great CX Also Leads to Higher CLV

A commonly used statistic maintains that it’s five times more expensive to acquire a new customer than it is to keep an existing one. When you consider this, it’s very clear why companies are so focused on delivering loyalty-building CX these days.

Our recent consumer research revealed that 87% of consumers are willing to buy more products from businesses that provide exceptional experiences and 81% are more likely to recommend those same businesses. In other words, great CX results in more revenue and new customers.

On the flip side, 80% of consumers are very likely to switch brands after a bad customer service experience.

Even your most loyal customers will abandon ship if you don’t take care of them. Relationships are built on trust, and nothing degrades customer trust quite like a bad contact centre interaction.

What does this have to do with customer acquisition cost? Recall that CAC needs to be compared to customer lifetime value to know if it’s at an appropriate, sustainable level.

If your contact centre is delivering the type of CX that increases loyalty and purchases, that means you’re increasing customer lifetime value.

When the CLV part of the CLV:CAC ratio increases, that either means acquisition costs are more feasible or your business can afford to increase marketing spend and acquire even more customers.

5. Managing Contact Centre Costs Is Critical for Optimizing CAC

Contact centre leaders are used to managing tight budgets. But hopefully, you now have another motivating reason to find ways to reduce or maintain costs.

When your contact centre is involved in sales, some or all of your costs are included in CAC, and we now know that lower acquisition costs are better.

Agent labour is the biggest line-item expense for contact centres, often accounting for 60-70% of total costs. To optimize labour costs, contact centres need modern workforce management (WFM) software that’s capable of accurate forecasting and scheduling and agile intraday management.

Additionally, organizations should use the remote agent trend as an opportunity to scale back the size of their facilities. And switching to cloud-based contact centre software can bring long-term financial benefits.

Finding ways to reduce costs in these big expense categories—agent wages, facilities, and software—will have a favourable impact on CAC and make your business more profitable.

Contact centres can help tilt the CLV:CAC ratio by providing exceptional CX, optimizing conversion rates, and carefully managing costs. The best contact centres are up to the task, especially if they are supported by industry-leading software.

This blog post has been re-published by kind permission of NICE CXone – View the Original Article

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Call Centre Helper is not responsible for the content of these guest blog posts. The opinions expressed in this article are those of the author, and do not necessarily reflect those of Call Centre Helper.

Author: NICE CXone