MEASURING CUSTOMER ACQUISITIONS COSTS (CAC)

Prof. Anil R Menon column
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In one my earlier articles we had discussed acquisition and customer retention strategies. Let me recap it for the benefit of all “Customer Acquisition is the key area where all businesses should focus on. The change of landscape by the COVID 19 pandemic offers new opportunities and demands for innovative solution in acquiring and retaining clients.  It is fair to say that the recent disruption would definitely impact the Customer Acquisition Process.”

We got a good feedback about the content of this article. We are happy that many of you found the article useful. As there were some questions asked we decided today to focus on answering the same. Some of the questions were: “Which are the best customer acquisition strategies to be adopted”, “What are the right marketing methods” and most importantly “How do we measure marketing & sales effectiveness”. Let me answer them one by one:

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The first step in any good acquisition strategy is Understanding the Requirements of the Customers: Let me reiterate here that the requirement and need of your target customer would have likely to be changed. This Pandemic has introduced new complexities in understanding customer sentiments and their purchase decisions. It’s important to know the shift of your customers’ need and impact of disruptions on their businesses and life.  This will make the customer acquisition process easier and smoother and reduce the turnaround time of converting a prospective buyer into customer.

Now the answer to the question of selecting the Right Marketing Method:

Here we will advise businesspersons to adopt digital Marketing as it will play a pivotal role in acquiring new customers given the increasing trend in the use of internet.Also Digital Marketing methods bring in transparency and help to get a better R.O.M.I. (RETURN ON MARKETING INVESTMENT) on the money invested.   Traditional Marketing methods should be more focused on local markets and building up customer relationship through personal connects. However a very important caveat here to all businesspersons: It will not be advisable to completely avoid traditional marketing method since low digital literacy and internet connectively stillleaves a large chunk of population untapped & unexplored.

Let me also reiterate the importance of customer retention strategies:

One of the best Customer Acquisition strategies is Customer retention.A mere 5% increase in retention ratio can increase company revenue by at least 25%.  Customer retention costs much less than acquiring new ones. Also satisfied customers bring in new customers without having to incur any additional expenses.  For high customer retention it’s important that we turn our customers into promoters of our products or services.

One of the methods to measure customer satisfaction is the Net Promoter Score (NPS). In this method each customer is asked a question on ‘how likely is he/shewill recommend this product/company to a friend or colleague?’

On scale of 1to 10. Customers who rate from 1 to 6 are detractors, 7-8 are passives and 9-10 are promoters. The % of promoters minus the % of detractors gives us the NPS. Higher the NPS more satisfied the customers are.

Companies should invest in customer services and always focus on customer experiences. This will turn customers into promoters of our products and services. After all word of mouth always pays in the long term. A customer & consumer vouching for our products/services is the most effective.

Measuring Customer Acquisition Cost (CAC):

This will give us the idea on which marketing strategies are generating revenues for the company.

CAC = (MC + SA + S + O) / CA, where:

  • CAC is customer acquisition cost
  • MC is marketing costs
  • SA  is salary for marketing and sales
  • S is marketing and sales software
  • O is overhead for marketing and sales
  • CA is customers acquired during the period

In conclusion CAC is one of the key metrics on determining the marketing efforts of the company and it should be calculated and monitored on regular intervals.

(Sincere thanks to CA Abhay Nair for his valuable contributions & Inputs by taking part in all the discussions pertaining to contents of this article)

Read The Article In Malayalam

Previous Articles in English:

Why is Rupee Unusually Appreciating Against the Dollar?

Adapt to survive and grow in challenging times

Have you stress tested your business?

Will interest rates decrease further

“Survival must be the immediate short-term strategy”

How to keep your customers close in troubled times

Seven “C” Model to survive and grow in these challenging times

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