As a rule, any sales channel that costs less than your current Customer Acquisition Cost (CAC) is a good sales channel.
What do “sales pipeline” and “sales channel” mean?
As a business works to acquire new customers, the sales team begins conversations with a series of potential customers, all at different stages in their decision about whether to buy. This list of potential customers is referred to as a “sales pipeline.” A “sales channel” is any method that a business uses to attract the attention of potential customers, causing them to enter the sales pipeline. For example, if you advertise your service on a search engine, that is one sales channel. If you call the marketing leader at several companies to offer your service, that is another sales channel.
What is “Customer Acquisition Cost (CAC)”?
Businesses compare their sales channels, so they can decide whether to continue to spend money on each channel – or maybe to put more money into one channel than into another. One of the ways they make this decision is by calculating the Customer Acquisition Cost (CAC). Here is the formula for CAC:
CAC = Total $ Spent on a Particular Channel / Total Customers Acquired from that Channel
For example, if you spent $1,000 in search engine ads, and you had two customers who bought your service as a result of search engine ads, then your CAC for the search engine channel would be $1,000 / 2 = $500.
Is it really that easy?
The math really is that easy, but (as usual) the devil is in the details. It is generally pretty easy to figure out how much money you spent on a particular marketing channel, since you probably paid an invoice to a marketing business. However, it is less easy to figure out how many of your customers came in through that particular channel. The customer may not tell you how they heard about your service, causing you to undercount the customers acquired through that channel. Or, they may have heard about your business through multiple channels, telling you only about one of them. Sophisticated digital marketing teams will be able to accurately attribute a large percentage of your customers to their original advertising sources. However, even the best digital teams will have unknown sources for a significant percentage of your customers.
How long do you wait before calculating the CAC?
Another complexity in calculating CAC is timeframe. In some businesses, customers make a buying decision within a few minutes or hours. This enables you to learn very quickly if a particular marketing channel is effective. You could calculate your CAC at the end of each month, looking at money spent that month and dividing it by the number of purchases. However, this doesn’t work for any business in which a customer might take some time to make the decision. (These businesses are said to have a long “sales cycle.”) In some businesses, customers may consider the purchase for years before finally buying. In this case, it is more challenging to calculate CAC, since you would need to wait a couple of years before you knew how many customers had resulted from each channel! Businesses like this have to come up with creative ways of estimating their CAC in the short term.
Remind me: Why should I care about CAC?
Once you know your CAC, then it is easy to evaluate any new marketing opportunity. Let’s say I know that my average CAC is $200. (That is, it generally costs me $200 to acquire a new customer.) Then, I should be excited about any new sales channel that enables me to acquire a new customer for $200 or less. In short, I should be willing to pay up to $200 in cash to anyone who refers someone to me who later becomes a customer.
So, if my online analytics company made a partnership with a website management agency such that the agency would make its clients aware of my services, then I should be willing to pay that agency a bounty of up to $200 for every one of its clients that purchased my online analytics services for its website. If I could make an agreement for a $50 bounty, then I would be thrilled with the deal.
When would a partnership not be a good idea?
You might be wary of a co-marketing partnership if you are exposing your clients to an agency that could copy your services and lure the clients away from you. So, when you enter a partnership that exposes your client list, it is wise to make sure that your services are complementary to their services, not overlapping (or even the same). That said, if you are adding real value for your clients, then you shouldn’t fear competition. Your clients will appreciate your making them aware of additional services that will enhance their businesses, which will increase their trust in you and your business.
While getting exposure to new clients because of the partnership may be a “win,” your marketing partner is likely to want to continue “ownership” of the relationship with their own clients, such as by requiring that you work through the partner when you deliver work to those clients. To ensure a smooth working relationship and avoid conflicts, it is important to agree on the specifics of the working arrangement before you agree to the partnership.
Finally, if you are having trouble filling your sales pipeline because you are too busy serving your clients, then perhaps you should consider a different approach to filling your sales pipeline. It might be time to hire someone dedicated to marketing and sales activities. You may not be able to bear the risk of hiring a full-time role for customer acquisition. However, you might be able to find a person or agency who would be willing to work on commission, dramatically reducing your risk.