Customer Acquisition Cost – Everything You Need To Know

Customer acquisition cost is one of the most important metrics that you must pay attention to if you want to build a sustainable business.

We would argue that it’s also one of the most misunderstood metrics because the way entrepreneurs tend to approach it is all backward. How so?

That’s exactly what we are going to discuss in this article. Here’s everything you need to know…

Table of Contents:

Customer Acquisition Cost (CAC) Definition

Customer acquisition cost (CAC) is a business metric that shows how much money on average it costs for you to acquire a new customer.

It’s calculated using this formula:

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

So, for example, if you spent $1,000 on marketing and sales and acquired 100 new customers, your CAC is $10:

$1,000/100 = $10

Customer Lifetime Value (CLV) Definition

Customer lifetime value (CLV) is a business metric that shows how much revenue on average a single customer brings in over their entire lifetime as a customer.

There are several ways to calculate CLV depending on your business model but the simplest one is this:

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

Say, if the average customer spends $50 per year and the average length of a customer relationship is three years, then your CLV is $150:

$50 x 3 = $150

Here’s another formula:

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

Say, if the average order value is $10, the average number of purchases per year is 3, and the average length of a customer relationship is 3 years, then your CLV is $90:

$10 x 3 x 3 = $90

And here’s a simple CLV formula for SaaS businesses:

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

Say, if the monthly ARPA is $1,000 and the monthly revenue churn rate is 15%, then your LTV will be $6,666.

You can also use this advanced CLV formula for SaaS businesses:

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

Say, if the monthly ARPA is $1,000, the gross margin is 40%, and the revenue churn rate is 15%, then the CLV would be $2,666.

As you can see, the CLV changes drastically once you introduce the gross margin variable into the equation.

It’s preferable to use the advanced formula because it’s more accurate.

If you have a SaaS business, or really any kind of subscription business, we recommend reading up on how to properly calculate various business metrics because the math becomes much more complicated once you have to account for factors like churn.

The Relationship Between CAC and CLV

Customer Lifetime Value is the primary limiting factor when it comes to Customer Acquisition Cost.

CAC not only cannot exceed CLV, it also cannot be equal to it – it needs to be significantly lower than CLV if you want to build a sustainable business that generates profit.

The one exception here is VC-funded businesses that focus on growth as opposed to profitability in the hope that once they amass an enormous user base they will figure out how to monetize it.

But the rest of us who don’t have millions upon millions of dollars to burn on acquiring users that might convert into paying customers one day have to be sensible about this from the get-go.

However, while you do need to watch your CAC, we believe that the emphasis on reducing it as much as possible is misguided.

And here’s why….

“Whoever Can Spend the Most to Acquire a Customer Wins”

Our co-founder Russell Brunson sees Dan Kennedy as one of the major intellectual influences that shaped his entrepreneurial journey.

One idea that he found particularly helpful that he continues citing to this day is this:

“Whoever can spend the most to acquire a customer wins.”

Russell had an opportunity to discuss this with Dan Kennedy himself.

Kennedy explained that math is the gravity of the direct marketing business. Nothing overcomes bad economics.

“You can have the best funnel in the world but if you got bad math and you don’t do anything about that math you’re going to get bit.”

Meanwhile, whoever figures out how to spend the most to acquire a customer wins because they can buy speed, scale, and sustainability.

Moreover, this aggressive approach to customer acquisition will discourage the competition because your rivals simply won’t be able to keep up with it.

@russellbrunson
Whoever can spend the most money to acquire a customer wins #entrepreneur #entrepreneur101 #businessmotivation #entrepreneurjourney #russellbrunson
♬ original sound – Russell Brunson

How to Increase Customer Lifetime Value

So how can you get to the point where you can afford to outspend everyone else on customer acquisition?

Simple: Given that the primary limiting factor when it comes to customer acquisition cost is customer lifetime value, increasing customer lifetime value will allow you to increase your customer acquisition cost.

What is the Value Ladder Sales Funnel?

We believe that the most effective way to sell anything online is the Value Ladder sales funnel.

It was created by Russell who then used it to take ClickFunnels from zero to $10M+ in annual revenue in just one year (it’s at $100M+ now!).

This sales funnel has four stages:

Bait – You offer the potential customer your lead magnet in exchange for their email address.
Frontend – You offer the potential customer your least expensive and least valuable product or service.
Middle – You offer the customer a more expensive and more valuable product or service.
Backend – You offer the customer your most expensive and most valuable product or service.

Ideally, you also offer a continuity program of some sort, meaning, a subscription product that generates recurring revenue.
We also recommend adding downsells, upsells, and cross sells to these core offers in order to maximize your revenue.

The reason why this sales funnel works so well is that it allows you to:

Start the relationship with that person by offering free value.
Nurture that relationship by continuing to provide free value via email.
Build trust by providing progressively more paid value at each stage.

Here’s how Russell explains it:

So the main idea here is that you drive traffic to your lead magnet landing page, convert those visitors into email subscribers, and then use email marketing to drive traffic from your email list to your sales pages.

At first glance, this approach might seem convoluted, especially if you are used to driving traffic directly to your sales pages. But it’s a much better way to sell your products and services.

If you do it right, it can help you drastically increase your CLV, which will consequently enable you to increase your CAC and outcompete your rivals.

How to Build a Value Ladder Sales Funnel

You don’t need to have a lead magnet + three offers + upsells, downsells, and cross sells to create a Value Ladder sales funnel for your business.

You can start with just a lead magnet and a frontend offer and then build out the rest of your Value Ladder over time.

Step #1: Create a Super Valuable Lead Magnet

A lead magnet is a freebie that you offer to the potential customer in exchange for their email address.

Both physical and digital lead magnets can be effective but we recommend starting with the latter because it’s less risky.

A digital lead magnet can be anything that the potential customer can either download to their device or access online:

A report
An eBook
A video class
A video course
An email course
A webinar

…etc.

What’s important is that:

Your lead magnet provides a solution to a problem that the potential customer is struggling with.
That problem is either the same one or related to the one that your frontend offer addresses.

Ideally, your lead magnet should not only serve as bait but also set the stage for the upcoming frontend offer pitch.

One way to achieve this is the “Free Sample” approach where you use a free sample of your frontend offer as your lead magnet. This works best for selling info products.

Say, if your frontend offer is a book, you can use its first chapter as a lead magnet. If the potential customer likes it, they will probably feel inclined to buy the book.

Another way to achieve this is the “Free Information + Paid Tools” approach. This works best for selling software products.

For example, we have a bunch of educational lead magnets where we teach people how to grow online businesses with sales funnels. And then we pitch them our funnel-building software!

A similar “Free Information + Paid Service” approach can work well for selling services: you teach the potential customer how to do something (e.g. build links to their website) for free, then pitch a service where you do it for them (e.g. link building).

That might seem counterintuitive because why would someone hire you to do something if you just taught them how to do it themselves?

But the reality is that people who can afford it prefer to outsource. This is especially true when it comes to tasks that are often perceived as tedious and complicated (e.g. accounting).

Finally, if you are selling coaching of any kind, you can use the “Free Information + Paid Consultation” approach where you provide free information and then pitch a one-on-one consultation with you.

Whichever approach you choose, you need to make sure that your lead magnet provides genuine value.

The days when people were excited about random low-effort lead magnets are long gone. Everyone is burnt out on digital junk at this point!

This means that potential customers won’t give you their email addresses unless you offer them something super valuable in return.

That’s why the secret to designing an irresistible lead magnet is to create something that your dream customers desperately want…

And then offer it to them for free!

Step #2: Create a Landing Page for Your Lead Magnet

Okay, now that you have your lead magnet, it’s time to create a landing page for it. This is the page that you will be driving traffic to.

It’s probably best to start with a squeeze page which is the most basic type of landing page characterized by being just one screen long.

You can always upgrade to a medium-length landing page once you have validated your lead magnet.

Here’s a simple, yet high-converting squeeze page that we are using for our “The Funnel Hacker’s Cookbook” lead magnet:

Create a Landing Page for Your Lead Magnet

Get “The Funnel Hacker’s Cookbook” for FREE!

We don’t recommend building your landing page from scratch if you don’t have any previous landing page design experience. Why?

Because online marketers have been relentlessly optimizing landing pages for more than two decades now.

At this point, we know what works and what doesn’t. Or, to be more precise, we know what’s most likely to work. Want to create a high-converting landing page?

Your best bet is to use a proven landing page template that follows the established landing page design best practices.

Our software, ClickFunnels, includes a template library that features landing page templates for all of the most common use cases.

So why waste time reinventing the wheel when you can simply do what’s been proven to work?

Start Your Free Trial

Step #3: Create an Irresistible Frontend Offer

Okay, so now that you have your lead magnet landing page, you are done with the Bait stage of your Value Ladder.

You could start driving traffic to your lead magnet landing page right now to grow your email list.

But we recommend building out the Frontend stage first. That will enable you to convert those email subscribers into paying customers.

While you could use an existing product or service as your frontend offer, it’s best to create a new one specifically for that purpose.

The most important thing that you should keep in mind is this formula:

High Value + Low Price = Irresistible Offer

This may seem like common sense but it’s not as common as you might think.

Entrepreneurs often fail to adhere to this formula and then wonder why they are struggling to make sales!

And here are three practical tips that can help you create a frontend offer that converts:

Use an info product as your frontend offer – eBooks, video classes, video courses, all these formats can work well. But it should be an info product regardless of what your company sells.
Price it at $7 – This is the perfect price point because it’s not low enough to make the potential customer question the quality of your frontend product but also not high enough to make them stop and think twice before buying.
Offer an unconditional money-back guarantee – 30 days is the absolute minimum but you can also have a 60-day or even a 90-day guarantee. This removes all financial risk from the purchase decision.

Your frontend offer should be a no-brainer impulse purchase that people will happily buy on a whim because why not.

After all, the purpose of a frontend offer isn’t to make you loads of money, it’s to convert leads into paying customers. You want to remove all obstacles that might get in the way of that!

That being said, while the price we suggest may seem low, $7 is nothing to scoff at, especially from the perspective of increasing CLV so that you could then increase CAC.

Those extra seven bucks can enable you to be much more aggressive with customer acquisition!

Frontend Offer Example: “Perfect Webinar Secrets”

Russell primarily used webinar funnels to grow ClickFunnels from zero to $10 million in annual revenue in just one year.

At the time, he would aim to do 5-7 webinars a week and sometimes would end up doing 2-3 webinars in one day. Pretty crazy but it worked!

Get “The Funnel Hacker’s Cookbook” for FREE!

Needless to say, everyone wants to know how he pulled this off, so he could charge a lot of money for sharing his knowledge.

But instead of doing that, Russell created an info product called “Perfect Webinar Secrets” that we now use as one of our frontend offer.

This is the High Value + Low Price = Irresistible Offer formula in action. Who’s gonna say no to learning from one of the top sales funnel experts in the world when it only costs $7?

Worst case scenario, you can simply get a refund!

Get “Perfect Webinar Secrets” for just $7!

Step #4: Create a Sales Page for Your Frontend Offer

You also need a sales page for your frontend offer.

We recommend using one of the proven sales page templates from the ClickFunnels template library.

As for the copy, sales page copywriting is a huge subject that we can’t cover adequately in this article due to space limitations, but here are some guidelines:

Make sure that your headline conveys the value of your frontend offer. How will it make the potential customer’s life better? Lead with that.
Have a subheadline that provides more information about your frontend offer. What exactly are you selling? Describe the format (e.g. eBook), the scope (e.g. 367 pages), and the price (e.g. $7).
Focus on the benefits of your frontend offer in the body copy. Reiterate the primary benefit that you mentioned in the headline and introduce additional benefits.
Display social proof such as customer testimonials, endorsements from well-known people in your niche, and “As Seen On” media badges.
Provide a no-questions-asked money-back guarantee. As we discussed previously, a 30-day money-back guarantee is the absolute minimum. You want to remove all financial risk from the purchase decision.
Use offer-specific call-to-action button copy (e.g. “YES! I want Instant Access to ‘Perfect Webinar Secrets’”) instead of generic copy (e.g. “Buy Now”).

Following these guidelines will help you lay a solid foundation. Once you have that, you can use split testing to optimize your copy.

That being said, copywriting is the most important skill that you need to learn if you want to make money online. But you probably don’t have the time to invest years in mastering it. You have a business to run!

That’s why our friend Jim Edwards wrote a book called “Copywriting Secrets” in which he distilled the most important copywriting principles.

You can read it in a few days, learn what you need to know, and start implementing it in your business. Do it right and you’ll see immediate results!

reate a Sales Page for Your Frontend Offer

Get “Copywriting Secrets” for FREE!

Step #5: Create a 6-Email Welcome Sequence

Okay, so you got the potential customer’s email address. How should you go about selling your frontend offer?

We don’t recommend hitting them with a sales pitch immediately. You haven’t built enough trust yet!

Send them this 6-email welcome sequence instead:

Email #1: Who Are You? Introduce yourself to the new subscriber.
Email #2: Where Did You Come From? Share your origin story. How did you come to do what you do now?
Email #3: What Do You Do? Explain in more detail what it is that you do.
Email #4: How Did You Gain This Expertise? Explain what makes you qualified to do what you do. Share relevant experience, credentials, and accomplishments.
Email #5: Who Do You Do This For? Explain who are your dream customers + share a case study on how you helped such a person get the results that they wanted.
Email #6: How Can You Do It For Me? Pitch your frontend offer and provide a link to its sales page.

Send one email per day so that the entire sequence would take six days to complete. You can set it all up using ClickFunnels email marketing functionality.

If you do it right, by the end of this welcome sequence the potential customer will probably be open to checking out your frontend offer.

Of course, that doesn’t necessarily mean that they will buy it there and then, but you will have a much better chance at closing the sale now that you have built some trust.

This is another way to increase your CLV: using this welcome sequence can help you maximize sales at the Frontend stage.

Step #6: Add an Upsell to Your Frontend Offer

An upsell is an upgrade on the offer that the potential customer has already accepted.

Here’s the formula for an irresistible upsell:

A Drastic Increase in Value + a Small Increase in Price = Irresistible Upsell

Let’s say that your frontend offer is an eBook.

Here are some upsell ideas:

A bundle that includes the eBook version, the audiobook version, and the paperback version of your book.
A bundle that includes exclusive content such as case studies, interviews, videos, etc.
A bundle that includes access to a live event with you (e.g. a Q&A webinar).

Also, if you are just starting out, you might want to consider doing things that don’t scale, such as offering a free one-on-one consultation with you as an upsell. This won’t make sense from a financial perspective but it can be an excellent way to learn more about your dream customers.

When it comes to pricing, you want to stay within the impulse buy range, which is why we recommend charging $9.99 for your upsell.

Those few extra bucks may not seem like a big deal but adding an upsell to your frontend offer will help you increase your customer lifetime value even more.

Step #7: Start Driving Traffic to Your Value Ladder Sales Funnel!

Okay, so now that you have your Value Ladder sales funnel, it’s time to start driving traffic to it.

We believe that the best way to do that is paid advertising because paid traffic is immediate, targeted, and scalable.

All of the major social media platforms allow you to run ads:

Facebook
Instagram
Twitter
LinkedIn
YouTube
TikTok

Choose the platform that makes the most sense for your business, create an ad campaign for promoting your lead magnet, and start driving traffic to its landing page.

Begin with a small daily budget then gradually increase it once you figure out how to run ads profitably.

Also, now that you have traffic, you can use split testing to optimize your sales funnel. This can help you 2x, 5x, or even 10x your funnel profits!

Of course, you don’t want to remain completely reliant on paid traffic forever, which is why you should also allocate resources to building traffic-generating assets of your own (e.g. a social media following, a blog, a YouTube channel, etc.).

However, we highly advise mastering paid traffic, streamlining your sales funnel, and getting to the point where you are consistently generating profit first.

Once you have all that dialed in, you can begin diversifying your traffic sources.

But What if Your Customer Acquisition Cost is Completely Out of Control?

Implementing the advice in this article should help you increase your customer lifetime value and thus enable you to spend more on customer acquisition.

However, if your customer acquisition cost is completely out of control, you might have to address that directly.

In that situation, there’s probably an issue at the Bait stage of your Value Ladder, so that’s what you should look at first:

Traffic – It’s possible that the people you are sending to your lead magnet landing page aren’t a match for your business and therefore your free offer doesn’t resonate with them. In that case, you need to improve your ad targeting.
Copy – It’s possible that your landing page copy doesn’t convey the value of your free offer. In that case, you need to improve the copy.
Offer – It’s possible that your free offer isn’t valuable enough. In that case, you either need to increase its value or come up with a better offer.

Of course, if it’s easy for you to generate leads, but you then struggle to convert them into paying customers, you need to look at the Frontend stage instead.

The data will tell you what needs to be fixed.

Case Study: From $20+ Cost Per Lead to $3-4 Cost Per Lead

Once two members of Russell’s inner circle were using a webinar funnel to grow their business but it was an uphill battle. What was the problem?

Their cost per lead on Facebook was somewhere between $21 and $24 which is insane!

When Russell looked at their webinar registration page, he spotted the cause of their lead generation woes immediately:

“I looked at it and said:

‘I know exactly what the problem is.

The problem is that there’s no curiosity!

When I look at that page, I know exactly what’s happening in the webinar, so because of that the registration rate is going to be low and the show-up rate is going to be even lower.”

Once they adjusted their landing page copy to pique the potential customer’s curiosity, their cost per lead went down to $3-$4 and their show-up rate went from around 15% to around 30%.

Consequently, their customer acquisition cost decreased drastically, which led to a massive increase in profits!

Build a Sales Funnel for Your Business With ClickFunnels!

ClickFunnels has everything you need to build a sales funnel for your business:

Sales funnel and landing page templates.
Visual editor that you can use to customize those templates.
Email marketing functionality that allows you to send broadcast emails, set up automated email sequences, and create email workflows with behavioral triggers.

We also offer a free trial which means that you can check out our software without any risk.

So why not start building your Value Ladder sales funnel today?