You’ve probably noticed how fast product-led growth models are skyrocketing in popularity.
Wondering why everyone is so gung-ho about this business methodology?
One of the biggest reasons is this: Product-led approaches can plummet your customer acquisition costs. Not only does that mean more profit lands on your organization’s bottom line, but it also means there are more resources on hand to propel your Product team forward.
Wondering how exactly product-led growth slims down customer outreach spending? In this article, we dig into the product-led approach and list the four ways it can lower your customer acquisition costs.
What is customer acquisition cost?
Customer acquisition cost (CAC) is a metric that tells you how much your company is spending to bring in a new customer. In traditional sales models, customer acquisition costs were mostly used to decide if the amount of money you were spending on marketing or direct advertising was paying off.
Now, with so many companies relying on recurring revenue models, customer acquisition costs can sway the entire company’s profits. That’s because recurring revenue models require a balancing act, where you’re increasing the lifetime value of customers while keeping the costs of bringing those customers in low. Every penny you save on customer acquisition costs you can drop into more resources for your Product team and product enhancements.
How do you calculate customer acquisition cost?
The most basic way to calculate customer acquisition cost is to start by adding up the money you spend attracting and bringing on a new subscriber or customer. Next, divide that total by the number of new subscriptions or customers you acquire in a given period.
In today’s world, it’s important to remember that a new customer doesn’t need to include a new face. You’ll often bring in new revenue from an existing customer through upgrades, upsells, and cross-selling.
How do product-led strategies lower customer acquisition costs?
So, what’s the connection between product-led strategies and customer acquisition costs? Here are four clear ways product-led growth trims your CAC:
1. Product-led plans target more qualified leads.
There was a time when marketers would spray messages about their product out to anyone who would listen, hoping to hit a few interested leads along the way. But product-led plans are more focused. Instead, product-led strategies latch onto product qualified leads (PQLs). These are people who have already indicated that they’re interested in using your product or express interest in making an upgrade.
The result? By focusing time and resources on PQLs, you weed out those leads that never wanted or needed your product in the first place. So your outreach efforts hit more people who want your product, you squeeze more out of your customer acquisition efforts, and CAC falls.
2. It drives revenue from existing customers.
Product-led strategies work by boosting your user’s experience. Rather than casting a wide net and trying to snag a few new customers, this strategy ignites more revenue from existing customers.
Wondering what the advantage is of focusing on customers you already have on board? There are two big ones:
- It increases revenue. By enhancing the user’s experience, you can pave a path to more income. In fact, 87% of business leaders say customer experience is their No. 1 growth engine. And the more money that’s flowing in, the more revenue you have to boost the user experience even more.
- It lifts your CAC-LTV ratio. By driving more revenue from your current customers, you bolster your customer acquisition cost to lifetime value ratio (CAC:LTV). Ultimately, that means the cost of bringing in new customers is lower, and the amount of money your current customers are spending on your product grows. When your company’s CAC:LTV ratio is healthy, you have more flexibility if you decide to grow your customer base. It also means you’ll have extra fuel if you decide to kick your customer acquisition engine into high gear.
3. It reduces your marketing costs.
When your team pumps more energy into improving the user’s experience, it deflates your marketing and brand outreach needs. That’s because you’re growing your revenue and promoting your brand from inside your existing customer base outward. In turn, your users become your biggest brand ambassadors, even as they funnel more revenue into your product.
Here are two simple ways how:
- Your customers become marketers. By improving user experiences, you turn existing customers into marketing assets who proudly promote your company. For instance, as your customers share their favorite experiences with the broader web community through online reviews, they’re also doing much of the marketing for you. And it can be extremely effective marketing. In fact, some reports suggest online reviews have more than 6% more search weight in local searches.
- More customers embrace your brand. Improving your product for users can also drive up your brand’s reputation. In fact, in some cases, improving user experience has lifted brand affinity by 50%. In the end, product-led growth promotes marketing organically, from within, shaving down your need to spend as much time and money on traditional marketing efforts.
4. It trims customer acquisition needs.
Perhaps the biggest way product-led growth lowers customer acquisition costs is by simply cutting down your customer acquisition needs. In PLG models, you don’t need to attract as many new customers to grow your company because you’re lifting every customer’s lifetime value.
As you improve customer engagement and use metrics to reduce retention, you’ll be increasing the amount of money users are handing to your company. At the same time, you’ll be retaining more of that money through higher net dollar retention. As customer lifetime value increases, your acquisition needs and costs naturally fall, leaving your company even more money to put back into the user’s experience.
Start commanding your PLG strategy.
Slicing your customer acquisition costs is a big advantage of using a product-led growth strategy at your organization, but it’s far from the only advantage. When you master your PLG strategy, it can catapult growth across your entire company.
Ready to take your product-led success skills to the next level? Download our ebook, “Product-Led Success: The Professional’s Handbook,” and start leading your company to new heights.
