Why Client Acquisition Cost is Crucial to your Marketing Strategy

Minimum Effective Dose

The Minimum Effective Dose (MED) is simply defined as “the smallest dose that will produce a desired outcome.”

The concept has been around for many decades, but has more recently been associated with exercise and weight training in particular. The idea is simple - any resources allocated beyond the MED is wasteful.

To boil water, the MED is 100C at standard air pressure. Boiled is boiled. Higher temperatures will not make it ‘more boiled’. In fact, higher temperatures just consume valuable resources that could be used for something else more productive. To overcome a sickness, the doctor prescribes a routine of antibiotics. Having double the dose won’t heal faster - indeed, that may prove damaging.

The opposite is also damaging - instead of having 3 pills a day, having 1 won’t heal the sickness, and the issue will last longer.

In business, results can be disappointing - but the decision-maker is not always clear if it’s because the strategy is flawed, if the resources allocated aren’t sufficient, if there is something that isn’t being done...As a result, the business owner continues to pump in valuable resources - time, money, talent - without getting the results that they know the business is capable of achieving.

We often speak to business owners who fall into the unpleasant side of the 80-20 rule: they are doing 80% of the work, but seeing only 20% of the results.

Identifying the Leaks in your Marketing

If you take a business as a car, and the aim is to scale using a finite amount of resource (i.e. fuel), to maximise the output (i.e. mileage), you want to ensure the car is running as efficiently as possible, and more importantly, there are no leaks that may drain your tank. If you want to increase your mileage, you don’t do it by pumping in more fuel than your tank will carry - you look for areas where you can minimise leakage, and increase efficiency.

What does this mean for your marketing?

The fuel represents the investment you make in your marketing (paid advertising, networking, industry events, whatever else you do to bring in leads), the mechanics of the car represent your marketing and sales process (how you convert a lead into a prospect), and the output represents the number of clients that you get out the other end (clients signed, cash in the bank).

Creating a Solid Marketing Process

While no marketing process is 100% efficient (100% of leads converted to clients), the consequences of a leaky marketing process are more dire - and sometimes easier to address - than you may think.

We started working with a client a few months ago - this client’s business has been around for decades, and their monthly Google Ads budget is in the range of AED 30K per month. In addition, they ran several other lead generation activities, including a referrals-generating strategy, email marketing, posting on social media, and running free events with strategic partners. However, none of these activities cost quite as much as their paid online ads, and they could see from the stats that the ads were bringing in a lot of enquiries.

From the outside it looked great - hundreds of leads coming in, and sales people always busy. The challenge: single digit conversion rate.

In the first month of working together, we sat down and got them to crunch the numbers - not just looking at the input, but a detailed audit including the conversion rate from lead, to prospect, to client, and examining which channel they came from, at which points the lead ‘dropped off’, and what was the end result they were getting from their time and money.

The results were mind-blowing.

From the hundreds of enquiries they were getting through their paid ads, only a fraction were actually qualified into prospects, and even fewer ended up converting into clients. Apart from the 30K / month ad budget, if you take into account the number of hours the sales team were spending with each lead on the phone and in meetings, it added up to over AED 1m per year! In comparison, generating referrals from existing clients (although much fewer in number) had an almost 100% conversion rate, took almost no investment, and converted with far less sales effort. By getting them to work on a referral-generation strategy, they started seeing double-digit percentage growth before the end of the year.

Results-Driven Marketing Strategy

Armed with this new information, the marketing team was able to make crucial strategic decisions that allowed the company to stop leaking resources, and start investing rather than spending. (Invest: pay out, make back over time multiples of what was put in. Spend: pay out.)

Tim Ferris writes in The 4 Hour Body: “In biological systems, exceeding your MED can freeze progress for weeks, even months.” What that means is: over-investing resources past the point of benefit may have negative effects on the entire system which will take a long time to undo.

How to get around this? Get really familiar with the numbers. Once you know your numbers, it’s a mathematics game.

The Marketing Numbers you Need to Know

We’ll run through a very straightforward example, just to explain the idea:

Example numbers:

• Marketing Investment: $5000
• Number of Leads: 100
• Cost per Lead: $50
• Conversion Rate: 20%
• Client Acquisition Cost: $250

If you run the numbers above, and figure out that it requires a $250 investment to get a client, what should happen if you spend $200 on marketing? Conversely, what should happen if you spend $500 on marketing? (Above assumes a linear result, which isn’t always true in the real-world, but this is an example). If we knew our numbers, we would invest in marketing in a heartbeat. But we don’t, so we throw money at ideas, at gut feelings, at new social tools, without adequately measuring which strategies are working and which aren’t.

Pro Tip: Run the above data for each of your current marketing strategies separately. Knowing your Lead Acquisition Cost (LAC) and Client Acquisition Cost (CAC) per strategy will provide clarity on where to invest, and the expected outcome.

To help you do this, download our free LAC and CAC Calculator here. 

And if you want to talk through how to best apply this in your business, get in touch.