Customer Acquisition Strategy

The customer acquisition strategy and financial cost of customer
acquisition is a critical factor for any new business survival and often
underestimated in a growing business. The cost of getting customers can
be the difference between success and failure no matter how good a
business believes its product to be.  I once read that the goal of any
business is to acquire, develop and maintain customers at a profit. The
develop and maintain aspects are more clear forward but let’s focus on
the cost associated with acquiring new customers regardless of the
channel.  

Every
business needs to acquire new customers to make products and businesses
work. Whether the product is aimed at enterprises paying big money or
getting thousands of visitors to a website, how a business gets and the
cost of getting customers are the important part.

The
Definition of Customer Acquisition could be defined as “The process of
persuading someone to purchase a company’s goods or services”. The cost
associated with the customer acquisition process is a critical measure
for a business to evaluate in tandem with how much value having each
customer brings to the business.

Is The Business Ready for Customer Acquisition?

Paper
never refuses ink and this saying has been true in many a business or
sales plan when it comes to putting a cost on customer acquisition. The
cost is not just the marketing or sales cost but the time and resource
cost to getting new customers. Has the business planned for the sales
cycle, the demos, the travel, product trials or has a website planned
for the cost from free signups to paid, customer or product support
prior to a customer making a purchase. In other words, can a business
survive while potential customers go through the acquisition cycle?
While a quote like “move fast and break things” is exciting in a company
start-up situation, it may not be the best advice when it comes to
customer acquisition. The decision to start spending investor or
shareholder money taking a product to market and begin acquiring new
customers should be given the weight it deserves. Entrepreneurs or a
business might have spent months or years developing the product, so the
execution of the customer acquisition strategy has to be thought out
very carefully.

Even
before you spend a cent on customer acquisition ask the questions “is
the product ready for some/many customers”? Are there still bugs that
will make the customer interaction with the product flawed? While the
saying “done is better than perfect” to avoid feature creep is
practical; it would be a mistake to launch a broken product and fall at
the first hurdle.

To
take a step back into the business plan around customer acquisition,
can a business tick the box on questions like; how many sales calls per
day do you expect the salesperson to make, do they have a target list of
suspects and prospects, how much activity on the website can the
servers handle? Do you have the customer support with the knowledge
required to respond to the questions from new customers? Does the
product value proposition the salesperson has to sell make sense to
people outside the company? In other words, have you done customer
validation? These are the type of questions that you need to answer
before committing money to a launch.

Being Prepared Always Matters

Any
customer acquisition process is not straight forward or predictable but
especially so for new companies, but that doesn’t mean a plan is not
useful or necessary. The customer acquisition process is far from an
exact science. There are many things that can (and do) go wrong, however
there are some things that any business can do to mitigate risk and
improve the chances of successfully acquiring new customers. Be clear
with your team what “Cost to Acquire Customers” (CAC) means, is it
paying customers, trial customers, engaged prospects or even website
registrations.  In the long run it should only mean the cost to acquire a
paying customer.

Estimate the Cost of Customer Acquisition

Money
for new product or new business launches is hard won. The budget and
time for a start-up may be tight, so the business needs to estimate
“worst case scenario” the cost to acquire customers (CAC) before
beginning the marketing or sales process. A businesses CAC is loosely
defined as the cost of ALL the sales and marketing expenses over a given
period of time, divided by the number of customers the business plans
to acquire in that time frame. While no business can have a firm sense
of the CAC until they begin acquiring customers, having an estimate will
help the business leaders prepare to act accordingly.

Logic
rules, no matter how excited a business is about getting it out there,
do not underestimate the impact of starting the customer acquisitions
spend before the product is ready. The greatest risk apart from
alienating potential customers by launching a flawed product is the
money a business can burn through before it realises it got something in
the product wrong.  Every business should ask, what is the baseline
product I am willing to “show” potential customers and in what target
markets?

Thread
carefully in the world of social media and PR, spending time and money
on journalists to line up business or product coverage of your launch,
only to find out that the product is delayed or has issues, can put the
business credibility in jeopardy . Journalists lose interest pretty
quickly and are never your friends.

Do Realistic CAC calculations

While
a business waits for SEO efforts to kick in, a business may utilise
Google Ad Words to drive traffic for (a) for lead generation or (b)
sales. Take a look at this example. The cost per click works out at 50
cents, the resulting 1000 website visitors converting to a trial rate of
5% (50) at a cost of €500. These 50 trials are then converting to paid
customers at the rate of 10% which is 5. So each customer is costing
€100 in just lead generation expense excluding sales/product/support
costs. For many companies in the B2C space or in the B2B space with
software using the web as their main acquisition channel, it can be hard
to get the consumer to pay more than €100 for the product or service

Many
business underestimate or do not budget for a realistic CAC, if we take
the above example the cost of customer acquisition can climb rapidly if
leads require a sales person to convert them. This human interaction
can be as simple as email follow ups right up to inside sales people
doing multiple sales calls and demos. Depending on the
trial/registration rate along with sales conversation rates the cost can
vary from €400 to over €5,000 per new customer acquired, depending on
the level of interaction needed.

Another
CAC calculation is to look at the cost of a field sales force. The
fully loaded cost of a field sales executive with travel, car, expenses
and salary can push the CAC into over €10,000 in enterprise sales.

In
trying to address the single most important early-stage question –
customer acquisition – it is easy to waste a lot of money in the wrong
channels and on the wrong customer acquisition tactics (lots of
companies in the graveyard from just this one failure), especially the
new companies that went  toe-to-toe with the big guys and can got blown
away.

Every business has to execute in a different way

A
business will only thrive by marketing and selling smart; acquiring
customers in an economic way and in a way that differentiates the
business from the crowd. To goal is to build a customer acquisition
strategy for paying customers the business does not have to keep paying
for every month.

Create Demand

In
larger companies with deeper pockets while the customer
acquisition isn’t exactly simple, they do have more resources. The
process of customer acquisition is more challenging for newer companies.
Established business’s will utilise bigger budgets, have greater brand
awareness, and an ever growing community of influencers. Most new
businesses will not launch with a partnership with an established brand
like Microsoft, Apple or Google where the demand for the product already
exists. Instead a new business has to allocate sales resources and
money wisely to fight (and a fight it is) to let potential customers or
audiences know that you exist, explain to them why they should show
interest, and initially even offering to go the extra mile by holding
their hand through the sales process.

The
focus of everyone in a new business is not only to create the brand but
also the demand. Sales and marketing are not two different
departments,  the person leading the marketing drive needs control spend
on brand marketing and really understand how to execute lead nurturing,
content marketing, web demand generation programs and work hard at
marketing efforts that require time but not money. Marketing and sales
need to work at the hip to generate a steady, growing stream of leads
each and every month.”

Acquiring new customers means understanding what makes your customers tick and
investing in inbound marketing strategies such as content and quality
articles, got onto the forums, become a subject matter expert and invest
in search engine optimization (SEO) as a longer term tactic.

The Business Model

Business model viability, in the majority of new companies, will come down to balancing two things:

Cost to Acquire Customers (CAC)

The ability to extract value from customers, or LTV (Lifetime Value of a Customer)

Web
based companies have long understood these metrics as they have a much
easier easy way to measure them. However there are huge benefits for all
businesses to look at these same metrics.

To
repeat the message from a few paragraphs back, to calculate the cost to
acquire a customer, CAC, a business needs to take the entire cost of
sales and marketing over a given period, including salaries and other
headcount related expenses, and divide it by the number of customers
that a business has acquired in that period.  (In pure web plays where
the headcount does not need to scale as customer acquisition scales, it
is also very useful to look customer acquisition costs with/without the
headcount costs.)

To
compute the Lifetime Value of a Customer, LTV, you would look at the
margin that you would expect to make from that customer over the
lifetime of your relationship. Margin should take into consideration any
support, installation, and servicing costs.

Manage Optimism with Reality

To
be in business requires huge optimism, and in a belief in how much
customers will want to buy your product. Unfortunately this can lead
businesses to believe that customers will be kicking down the doors to
purchase the product. This has the effect of grossly underestimating the
cost it will take to acquire customers. In too many companies there is
little or no focus on how much it will cost to acquire customers. Vague
strategies along the lines of social media marketing, and/or viral growth with no
numbers is not what you call business!

To
finish, a well thought out CAC plan outlines the need to acquire
customers through a series of steps like SEO, SEM, PR, Social Marketing,
direct sales, channel sales, etc. with the cost of each step worked
out. This planning brings honesty to the real cost of customer
acquisition.

Customer Acquisition Strategy – The Bitter Business