MBA1811 How To Manage Rising Customer Acquisition Costs

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To start today's lesson, I want to give you a simple example of calculating your customer acquisition cost. I'm going to use my own company, Webinar Ninja, our software company. At Webinar Ninja, when somebody signs up, they get a free 14 day trial. So when we're trying to convert a customer, we actually have to do it twice, not once. We gotta convert them to sign up for a trial and then we gotta have them stay past a trial and become a paying customer. Why is this important? Well, it all factors in, in the cost per acquisition. Let's say, for example, it costs me $50 to get somebody to sign up for a free trial. But not everybody that signs up for a free trial becomes a customer. Let's say a third of people that sign up for trial become a customer. So, so my cost per acquisition is not $50. That's only to get them to trial. On average, I need three trials to get one customer. So my cost per acquisition in this simple example is $150. Cost me $150 to get that customer. Now how do I know if that's a good cost per acquisition or if I can get better? How much I got better? Well, you always compare your cost per acquisition with your average lifetime value per customer. What's average lifetime value per customer? Well, that's on average how much money each customer will pay you in the course of their lifetime with you. So some customers will spend more than others or stay longer and spend more. But on average, you should know what this is. So let's say, for example, I average a lifetime value per customer is $500. That means I spend $150 to acquire a customer, but that customer gives me $500. So that's a profit of 350. But of course, it's not that simple. We also have to factor in the other costs it takes for me to serve that customer. And every business has different costs Whether it's the cost of the product or your servers or rent or whatever it is. But at least now you know what you're playing with. This is just an example so you understand. And some people include in their equation of cost per acquisition any other costs involved in their business to gain customers, including salaries in the marketing team, any kind of marketing software they use, you can go to that extent. And every business decides to do that differently. But if you have a simple business with a small team, even doing your customer acquisition calculation as simply as I did it today is a start. It's at least giving you a gauge. You're not like shooting in the dark. So the problem with this formula, the problem with this whole scenario is as soon as it gets a little bit more expensive for me to acquire a trial in my case, or acquire a customer in general, because the cost of ads goes up, which I have no control over, my profits start to get thinner and thinner. And it could just be a very simple small increase, but it makes a big difference. For example, if it cost me now $75 instead of $50 to acquire a trial, now I'm paying $225 versus $150 to acquire a customer via the ads. Not feeling so good, Right. So what are some strategies, what are some things you can do in your business to lower your cost per acquisition? Well, the first step, I would say, is try to acquire your customers through a longer period of time. If you spend a little time nurturing your customers, it's going to be less expensive to get them in the first place. Let me explain. Let's say you decide. Instead of driving an ad to a sale or a trial, you drive an ad to something a little easier to say yes to, like a free course, a webinar, even just a blog post. If you can get somebody to sign up on your email list for 5, 6, 7, even $10 per lead. And only 10% of people that join your email list buy something from you. Over time, you're still spending only $100 to acquire a customer versus 150 in the example I gave. Now, obviously this means that I'm nurturing people with great content, building rapport with them. I'm giving great value, I'm inviting them to workshops and webinars. And I'm seeing this more of a long term relationship. I'm not trying to close sales as quickly as possible. I'm trying to convert customers as quickly as possible. Over time, I can start tracking how much I need to spend, how many leads I need to get X amount of customers. So stretching the time period to sale. Some people call this lengthening the funnel or stretching the funnel. And it's a good starter exercise for you to try when you want to lower your cost per acquisition. Now, one of the things that we did is lower the barrier of entry, and we're going to continue to push this envelope to lower cost per acquisition. This is also called freemium, where you get people in your door to try your product or service for as cheaply or as easily as possible because you know your product will sell itself. So in the early days, webinar Ninja was a software that you can sign up for, you pay for it. And we gave a money back guarantee. But then we switched to a free trial allowing people to sign up and pay nothing for 14 days. This lowers the barrier of entry. No one is getting charged. This allows more people to sign up. That means you get more people going into your software, going into your funnel, a higher likelihood for you to convert them, because now you get your email, you can communicate with them, you can give them offers, you can invite them to webinars, you can nurture this audience. So even if they just stumble on your website, it's just easier for them to say, yes, let me give this a try. This helped us lower our cost per acquisition tremendously when we implemented it years ago. But things are continuing to go in that direction, and we're working on ways to lower the barrier entry even more. Some options are a limited sandbox or demo account or free account for people to use with a very minimal setup or signup process so they can validate to themselves. Yep, this is the product I want. And then when they're ready to unleash its full power, they can sign up and pay the highest level of this. And it all depends on your business. If you could do this is a free tier in your product or service. There are so many examples of this. Spotify has a free tier. You listen to Spotify for free, but you listen to some ads. Hulu has the same thing. Canva, the graphic design software, has a free plan that you can do a lot with. But if you want to go pro, you pay a little bit. And really all Canva needs to do is just spend money on awareness, which is a lot less expensive than conversion. Because they know if people just go to their website, they just say, hey, check out Canva. It's free. There's no sales pitch, there is no conversion needed. They can just sign up and try it out. They just acquired a customer or potential customer for very, very little. They can spend all their effort and their dollars, really, and their creativity on nurturing that sign up into a paying customer. That's a whole lot easier and a lot higher way to convert people. Or I should say your conversion rates will be higher because you're working and speaking to somebody who's already sold on what you have, they're using what you have versus a cold lead. Now this is applicable to all kinds of businesses, not just software businesses. This is why new restaurants will stand outside with samples of their food. This is why new E Commerce stores will offer a $50 voucher when you spend $150 or more on their first order. This is why when you buy a car, they encourage you and want you to take a test drive for free, of course, because they know if you experience this product, you will love it. In fact, a lot of car manufacturers will not even talk about the car so much. That and they will spend a lot of time in the commercials and their ads getting you to get in for a test drive. They'll say test drive one today. I've even been in dealerships. Will they let you to keep the demo car over the weekend? So this is nothing new. And of course it has a cost on your business to implement these freemium models, but the cost is far less at scale than it is to acquire customers in traditional ways like conversion ads on Facebook. One resource I highly recommend everybody read, no matter what industry they're in, is the Freemium manifesto. And you can download that free ebook@profitwell profitwell.com to me, it's one of the best reads on customer acquisition because it shows you how to do this with freemium. Now if you are running digital ads and this model is working for you, and maybe you can do freemium for some reason, here are a couple tips that can help you lower your customer acquisition other than driving traffic to an Opt in to get on your email list. Let's say you are driving traffic to a sales page to an actual signup. Well, run the ad to a warm audience, not a cold audience. What this means is run an ad to people that already heard of you, people that have liked your page. Or you can even upload an email list and run ads to those people in that list or people that are similar to them, people that are friends or family. They might have heard of you already. Your customer acquisition cost will be lower because those people are more likely to buy narrow in your demographic a little. If you sell skateboards, for example, yes, you Might have customers that are 60 plus that want a skateboard. No discrimination, great. But they're not the majority of your customers. Once you start opening the tap and saying, hey, I want to also advertise to 60 plus, you're spending a lot of money on a customer demographic that is not the majority of your customers. I'm just guessing here, I'm not a skateboarding business expert here, but the point here is that you don't want to waste money on a demographic that is least likely to buy. So narrow in on your most successful demographic. Even if it's just like, hey, I know that, you know, 30 to 45 year olds are my biggest customers. And if you don't know, you should. And you can survey your customers to find out. But if you know that and you narrow in your ads to that, you are going to have a lower cost per acquisition because those people are more likely to buy. Because you know, this is your demographic, this is your core audience. Of course there are going to be other people that are not in that demographic. But guess What? If I'm 60 plus and I want to buy a skateboard, I'll find you. If you're good, I don't need to be advertised to.

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All right, guys, again, if you are running ads and you still want to lower your customer acquisition costs, one of the ways to do it that I recommend you really spend some time on is optimizing your sales copy on the ad itself and the page they land on when they click on your link. Don't just settle for one copy and say, okay, that's it. Split test. Figure out which which copy does well, which images do well, which one really grabs the audience. Sometimes one copy is great for one segment of your audience and another for a different segment. And you can optimize and save a lot of money by doing this, but you got to be willing to put in the work. And what I recommend is that when you're writing copy for ads, just batch it right. If you're going to write a copy for ad, just write a whole bunch of copy for different audiences. Same thing with the sales page copy iffy on how to split test your ads or or your copy on your website. Two great tools. Number one for your ads use adespresso. They will do all the split testing for you. It's a great little tool to run your split test for Facebook, Instagram ads, Google Even a tool to easily split test your website copy, use Google Optimize. It's absolutely free and it's super simple for you to easily see different variants of any page on your website and see what happens. I just recently ran a campaign on a Google Optimize. Ran it for two weeks, found out a couple headline differences greatly changes my conversion rate and I went with that. And guess what? I'm not going to stop there. I'm going to take that new copy now and I'm going to test it against some other new copy and I'm going to test other pages. You get the point. Guys, thank you so much for listening to the 100 OMBay Show. If you love what you hear, hit subscribe right now so you don't miss an episode on any app you use to listen to podcasts, Spotify, Stitcher Radio, Apple Podcasts, Himalaya. We're on them all. Before I go, I want to leave you with this. You have to invest in acquiring customers. You can't stop marketing. You can't stop sales. Most of all businesses in the world are not household names, so they're not just going to get business just by word of mouth. So you have to actively be doing this. But know your numbers, know how much it costs you to get these customers so you can actively try to lower that cost so you can keep more that money. Thanks so much for listening and I'll check you in tomorrow's episode. Free ride Friday. I'll see you then. Take care. Foreign.

What's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hmm, that's music to my ears. I can only talk.

Investing involves risk, including risk of loss. Zero Account fees apply to retail brokerage accounts only. Sell order assessment fee not included. A limited number of ETFs are subject to a transaction based service fee of $100. See full list@fidelity.com commissions Fidelity Brokerage Services LLC member NYSE, SIPC.