I’ve looked over a good number of business plans in the past few years, and I’d say this is the most under-prepared section in the average startup’s strategy documents: specifically how are we going to acquire customers, and how much is our Customer Acquisition Cost (CAC) really going to be? Inevitably, those people go on to ask the question, “What is the cheapest way to acquire new customers online?”
That’s exactly what we are going to talk about today; how can you get your CAC as low as possible? I’ll give you a hint; it’s not by “outsourcing the marketing” to an agency. YOU know your business best, so you should be leading the charge on customer acquisition.
Ok, you might outsource some of the more tedious tasks in the long run, but you as the leader of the business need to set the strategy and find a way to execute it.
You won’t get cheap CAC by competing for keywords with the market leaders.
Think you can burn cash faster than Amazon? Of course you can’t. I’m not saying don’t compete in Social Media Marketing (SMM) or Search Engine Marketing (SEM). Just don’t get sucked into playing a losing game with the market leaders in your industry who are willing to burn barrels of cash in advertising budget to acquire a customer database.
If you’re spending more money in CAC per customer than they bring to you in gross margin on their first purchase, it’s time to reassess that acquisition strategy.
What is Customer Lifetime Value (CLV), and why should you care?
Simply put: CLV is how much gross margin (in $ terms) that customer is worth to your business, for the total time they remain a customer.
For example: a customer buys a $100 item from you, making you $35 gross margin. You forecast that customer to return at least once a year for 5 years to make a similar purchase. That CLV is: $100 x 0.35 = $35 x 5 = $175.
Why is this important?
Because your larger, better funded competitors will use Customer Lifetime Value to determine their maximum Customer Acquisition Cost.
You’re hoping to spend less than $35 to acquire that customer, while they can justify spending up to $175. We don’t want to be competing like that.
So, what is the cheapest way to acquire new customers online?
For smaller companies without vast sums of cash to burn, the answer is almost certainly: partnerships. And more specifically, Affiliate Partnerships.
A partnership that is mutually beneficial will last a lot longer than someone who is simply doing you a favour. Think about it; if there’s something valuable in it for both parties, there’s a lot more incentive for both sides to keep the partnership going.
An affiliate partnership is usually quite simple; people send your site traffic in return for a percentage of sales from that traffic. That percentage can be negotiated, but is usually 5-10% of the net sales value (sales, less returns and cancelled orders etc).
Why are affiliate partnerships such a cheap way of acquiring customers?
- Because you only pay when a successful conversion occurs. In our example above, you make a sale and $35 gross margin. You pay 8% commission to your affiliate (35 x 8% = $2.80), and keep $32.30. No wasting money on traffic that doesn’t convert.
- You usually only pay on the first conversion. Make sure your contract reflects this, and you’ll get to keep the full gross margin for the rest of the Customer Lifetime.
- You collect valuable information on qualified people who don’t purchase right away. Maybe they sign up to your newsletter? Join your social pages as fans? Leave feedback about how to make your site better? They might not convert into a paying customer immediately, but they are now part of your prospective customer list and, better still, it cost you nothing to get them.
How does an affiliate program work?
You and the affiliate sign an affiliate agreement and agree the commission rate (usually 5-10% of gross sales, less returns and cancelled orders). You then provide a tracking code that the affiliate uses for each URL linking from their website, email, social media, to your website.
This allows you to track inbound traffic from source (the affiliate), through to checkout, and attribute the sale to the referrer. At the end of the month, you tally the net revenue generated per affiliate, and make your commission payments accordingly.
A real-life affiliate example from PrivateSales.hk:
As a discount fashion retailer, PrivateSales.hk was competing for customers against a huge field of well-funded startups, established department stores, Amazon, Groupon, and many more global online fashion retailers. It quickly became clear that we couldn’t outspend most of our competition, so we developed an affiliate program.
One of our first affiliate agreements was signed with DealsHongKong.com a daily-deals site aggregator. We agreed to pay 8% commission for first time purchases initiated by traffic referred via a tracking URL we provided them with.
As you can see in the above screenshot, our affiliate DealsHongKong sent us 1,959 unique users (“Visitors”), which resulted in 16 sales (“Referrals”). Below is an excerpt of the sales commissions owing for this period.
What you don’t see from these stats is the extra few hundred email addresses that we collected from these 1,959 new visitors. These people would join our EDM mailing list, of which around 21% would eventually become paying customers.
After the first few months, it became clear that our affiliate partnerships were by far the cheapest way to acquire new customers online.
While our SEM and SMM acquisition costs were often as high or higher than our customers’ 1st-purchase-gross-margins, our affiliate program only gave away 8% of our gross margins, and increased our traffic, database size, and social media engagement. This was without a doubt our cheapest acquisition strategy.
An affiliate program might be just what your Customer Acquisition Strategy needs. You could consider a combination of affiliates such as any or all of the following:
- Local influential bloggers in your industry
- Online magazines and forums
- Professional affiliate companies such as Global Wide Media
- Complimentary businesses that target similar customers to you who might want to build a new revenue stream
Go on, get out there and start building some affiliate partnerships, and discover the cheapest way to acquire new customers online for yourself!