Customer Acquisition Cost

Let’s talk about Customer Acquisition Cost (CAC) a metric that’s super crucial for any business especially when you’re building something you want to last.

Now I’ve seen a lot of entrepreneurs get this metric all wrong and it’s usually because they’re approaching it backward.

So buckle up because we’re deep into what CAC really means and how you can make it work for you.

Ready to start building your own value ladder funnel and dominating your competition? Click here to learn more about Clickfunnels and get started! 🚀

Understanding the Basics of CAC

Ready to start building your own value ladder funnel and dominating your competition? Click here to learn more about Clickfunnels and get started! 🚀

Think of CAC as a simple yet powerful way to measure how much you’re spending to bring in each new customer.

It’s like a report card for your marketing and sales efforts telling you how effective they are at getting those first-time buyers.

The Formula: Breaking Down CAC

You calculate CAC by adding up your marketing and sales costs then dividing that sum by the number of new customers you’ve snagged.

It’s pretty straightforward.

Here’s the formula:

Customer Acquisition Cost = (Cost of Marketing + Cost of Sales) / Number of New Customers Acquired

For example let’s say you spent $1000 on marketing campaigns and another $500 on sales calls and ended up with 100 new customers.

Your CAC would be $15:

($1000 + $500) / 100 = $15

Customer Lifetime Value (CLV): The CAC’s Partner in Crime

Now CAC doesn’t exist in a vacuum.

It’s got a best friend a sidekick and a super important partner: Customer Lifetime Value (CLV). CLV is the average amount of revenue a customer brings in over the entire duration they’re doing business with you.

It’s like predicting how much a customer will spend with you from the moment they walk in the door (or click on your website) until the last purchase they make.

How to Calculate CLV

There are a bunch of ways to calculate CLV but I’ll break down a few of the most common ones.

1. Simple CLV for Most Businesses:

Customer Lifetime Value = Average Annual Revenue Per Customer x Average Length of a Customer Relationship in Years

Let’s say your customers spend $500 on average each year and they stick with you for about 3 years.

Your CLV would be $1500:

$500 x 3 = $1500

2. CLV for Businesses with Multiple Purchases:

Customer Lifetime Value = Average Order Value x Average Number of Purchases Per Year Per Customer x Average Length of a Customer Relationship in Years

If your customers spend an average of $100 per purchase buy 4 times a year and stay with you for 5 years your CLV would be $2000:

$100 x 4 x 5 = $2000

3. The Big Guns: CLV for SaaS Businesses

CLV = Average Revenue Per Account (ARPA) / Revenue Churn Rate %

For SaaS businesses where subscriptions are the name of the game it’s important to factor in churn (when customers cancel their subscriptions). Let’s say your average monthly revenue per account is $100 and you lose 10% of your customers each month.

Your CLV would be $1000:

$100 / 0.10 = $1000

4. Advanced CLV for SaaS Businesses: Don’t Forget Gross Margin

CLV = Average Revenue Per Account (ARPA) x Gross Margin %/ Revenue Churn Rate %

This formula is a bit more sophisticated and takes into account your gross margin (the percentage of revenue left over after covering the direct costs of providing your product or service). Let’s assume your ARPA is still $100 your gross margin is 50% and your churn rate is 10%. Your CLV would be $500:

$100 x 0.50 / 0.10 = $500

It’s essential to use the most accurate formula for your business especially if you’re in a subscription model.

The Golden Rule: CAC Must Be Less Than CLV

Remember CAC and CLV are like two sides of the same coin. They play a vital role in making sure your business stays healthy. Here’s the golden rule: Your CAC should always be significantly lower than your CLV.

If your CAC is higher than your CLV you’re losing money on every new customer.

It’s like spending $10 to earn $5. In the long run that won’t work.

The “Spending Your Way to Success” Strategy

Now this is where things get interesting.

A lot of people focus on lowering CAC as much as possible thinking it’s the key to success.

While it’s important to keep an eye on your CAC I believe that obsession with slashing it can be misguided.

Think of it this way: what if you could actually increase your CAC but in a way that leads to even bigger profits? That’s where the magic of CLV comes in.

The Power of CLV: Scaling Your Business

Russell Brunson a co-founder of Clickfunnels is a big believer in this strategy. He’s a fan of the idea that “Whoever can spend the most to acquire a customer wins.” He’s learned this from a marketing legend named Dan Kennedy who stressed that good economics are key to success. It’s all about understanding the numbers and making smart decisions.

Imagine you can spend more to get each customer but they then generate much more revenue for you over time.

That’s the power of a high CLV! You can create a sustainable business that grows faster and outperforms the competition.

How to Increase CLV: The Value Ladder Funnel

So how do you increase your CLV and create that amazing “spending more earning more” scenario? Here’s where the Value Ladder sales funnel comes into play.

What is the Value Ladder Funnel?

The Value Ladder funnel is a strategy that helps you build a long-term relationship with your customers moving them from “just a lead” to “a loyal advocate.” It’s based on the idea of offering a series of products and services that provide increasing value and build trust over time.

The 4 Stages of the Value Ladder Funnel

1. The Bait: This is your “freebie” — a valuable resource that entices people to give you their email address. Think of it as a tasty treat to get them hooked.

2. The Frontend: This is your “gateway” product or service. It’s designed to be a no-brainer purchase giving customers a taste of your expertise and building trust.

3. The Middle: This is where you start to offer more substantial products and services building on the value they’ve already received.

4. The Backend: This is your “crown jewel” offering the highest value and most premium products or services. These often come with high-ticket pricing and are targeted at your most loyal customers.

Examples of Value Ladder Offers:

• Lead Magnet: A free ebook checklist or cheat sheet related to your niche.

• Frontend Offer: An affordable course a low-priced digital product or a service package designed to deliver immediate results.

• Middle Offer: A more in-depth course a higher-priced digital product or a premium service package.

• Backend Offer: A high-ticket coaching program a membership site or a bespoke consulting service.

Why the Value Ladder Funnel Works

• Increased CLV: By offering a progression of products and services you encourage customers to keep coming back for more increasing their lifetime value.

• Stronger Relationships: The Value Ladder builds trust and rapport leading to more loyal and engaged customers.

• Better Sales: Offering a range of products and services lets you cater to different needs and budgets maximizing your sales potential.

The Secret to Creating Irresistible Offers

Now let’s talk about the key elements that make the Value Ladder work its magic:

1. The Lead Magnet: Hook Line and Sinker

Your lead magnet is like the “bait” that lures potential customers in.

Here’s how to make it irresistible:

• Solve a Problem: Focus on addressing a specific pain point or need your target audience has.

• Provide Tangible Value: Offer something concrete that customers can use and benefit from right away.

• Keep it Focused: Don’t try to cram too much into your lead magnet. Keep it concise and easy to consume.

• Use a “Free Sample” Approach: Offer a free sample of your frontend offer to pique their interest.

• Use a “Free Information + Paid Tools/Services” Approach: Provide valuable information for free then pitch your paid solution for those who want to take things further.

2. The Frontend Offer: The First Step to Success

Your frontend offer is your gateway to converting leads into paying customers.

Here’s how to make it a winner:

• High Value + Low Price: Offer something valuable at a price that’s hard to resist.

• Solve an Immediate Need: Make sure it solves a specific problem or fulfills a desire that customers have right now.

• Remove Friction: Keep the sales process simple and easy to understand.

• Consider a Low-Ticket Webinar Funnel: This can be a powerful way to engage potential customers and drive sales.

3. Upsells and Downsells: Extra Value Extra Revenue

Upsells and downsells are great ways to maximize revenue and provide more value to your customers.

• Upsell: Offer an enhanced version of their current purchase with additional features or benefits at a slightly higher price.

• Downsell: Offer a scaled-down version of the product or service at a lower price point allowing customers to access value even if they can’t afford the full-blown version.

Driving Traffic to Your Value Ladder: Paid Advertising

Now that you’ve built your Value Ladder it’s time to get people in the door! Paid advertising is a powerful way to drive targeted traffic to your funnel.

• Explore Different Platforms: Social media search engines and even display advertising can work for you. Experiment to see what resonates best with your audience.

• Target Carefully: Use data and insights to ensure your ads reach the right people who are most likely to be interested in your offers.

• Test and Optimize: Run A/B tests to see which ads perform best and constantly tweak your campaigns for better results.

• Consider Remarketing: Re-engage people who have interacted with your website or ads to keep them warm and nurture them through the funnel.

Balancing Paid Traffic with Organic Growth

While paid advertising can be a great way to get started quickly it’s important to think about long-term organic growth strategies.

• Build Your Own Assets: Invest in creating your own website blog social media channels or YouTube presence to attract visitors organically.

• Create Valuable Content: Share valuable insights tips and resources to build an audience and establish yourself as an authority in your niche.

• Engage Your Audience: Interact with your followers respond to comments and foster a community around your brand.

When Your CAC is Out of Control: Diagnosing and Fixing the Problem

Now let’s talk about the unfortunate scenario where your CAC is way too high.

It’s not uncommon and it usually means there’s something amiss in your Value Ladder or your marketing strategies.

Here’s how to diagnose and fix the issue:

1. The Bait: Is It Hooking the Right Fish?

• Lead Magnet Relevance: Make sure your lead magnet is truly irresistible and aligned with your target audience’s needs.

• Landing Page Optimization: Ensure your landing page is clear compelling and designed to convert visitors into leads.

• Traffic Quality: Are you targeting the right audience with your paid advertising campaigns? Make sure you’re not wasting money on irrelevant traffic.

2. The Frontend: Is Your Offer a No-Brainer?

• Value Proposition: Is your frontend offer truly valuable and solves a problem for your target audience?

• Pricing: Is your frontend price point appealing enough to drive conversions without sacrificing your profitability?

• Sales Page Conversion Rate: Is your sales page designed to convert visitors into buyers?

3. The Funnel as a Whole: Identifying Bottlenecks

• Customer Journey: Carefully analyze your entire funnel to identify potential areas where customers are dropping off or not progressing as you’d like.

• Data Analysis: Use tools like Google Analytics to track website traffic conversions and other relevant metrics to identify areas for improvement.

• Split Testing: Experiment with different variations of your landing pages sales pages and ad campaigns to see what resonates best with your audience.

Customer Acquisition Cost: A Continuous Journey

Remember CAC is not a one-time fix.

It’s a continuous journey that requires constant monitoring analysis and optimization.

As your business grows your CAC will likely evolve and you’ll need to adjust your strategies accordingly.

The Final Word: Own Your CAC

I want to leave you with this: don’t be afraid of your CAC.

Instead learn to understand it and use it as a powerful tool to grow your business.

By mastering the Value Ladder funnel optimizing your offers and driving targeted traffic you can increase your CLV and build a profitable and sustainable business that thrives.

So go out there and own your CAC!

Ready to start building your own value ladder funnel and dominating your competition? Click here to learn more about Clickfunnels and get started! 🚀