How to Reduce Customer Acquisition Costs (CAC) Using Contracts
Customer acquisition cost (CAC) is the money expended to gain new customers, divided by the number of customers gained. An important goal of every business is to reduce customer acquisition costs and increase the bottom line.
When CAC is high, a business may actually be suffering losses even as it acquires new customers. Spending $500 to win a customer that will net the company only $300 over that customer’s lifetime purchases means that the customer will cost the business $200. Not good.
The net outcome of CAC investment minus LTV return directly affects net earnings—the bottom line that gauges the success of any business, small or large.
Since negotiating and executing contracts can be costly, one effective way to reduce CAC is to streamline and automate contract management.
Lowering legal expenses to reduce CAC
Legal expenses can become a major contributor to higher customer acquisition costs. In some cases, companies will use outside lawyers as consultants who have high hourly rates. Larger companies may have in-house legal teams responsible for reviewing more significant contracts, among their other responsibilities.
The expense rises if the company needs a wide range of different contracts for its customers, partners, and vendors. People well-versed in the relevant law and business practices may need to work on each new contract. The time expended on creating contracts is costly, whether the company uses consultants or does the work in-house.
A company may also have people dedicated to contract negotiations. Their job is to establish fees, deadlines, and other terms for each party to the contract. For this task, there’s a cost in salaries and time spent in back-and-forth communications with counterparties with their own legal departments involved.
The same company may need to review copyright or patent protection for its own products or products it is acquiring. There may be agents or representatives involved on the other side. Prior contracts with the same party may need review. These and other variables can make finalizing a new contract a hands-on, lengthy, and expensive process.
Revising, tracking, and storing contracts
Another major issue is how the documents are reviewed, stored, and tracked from one department to the next. These issues are common across all business sectors.
Paper copies are mailed or emailed to counterparties or scattered around various departments. A contract may reside in Google Docs, Salesforce, or a desktop word processing folder, with no tracking system to follow them.
Sales reps tangle with company lawyers over the freedom to revise and send out contracts without yet another legal review. The legal department believes itself responsible for signing off on any changes, whether demanded by the customer or requested by the company. Making changes to similar sections of an agreement becomes costly as the hours of review pile up.
It can all get very messy, uncertain, and expensive. But starting contracts from scratch each time your team needs to execute one introduces friction and increases the cost of doing business significantly.
These expenses may be overlooked as simply the normal cost of doing business. But streamlining the process by using “smart contracts” and other automating strategies will reduce customer acquisition costs, sometimes in a dramatic fashion.
Rationalizing the process with contract lifetime management
One solution is contract lifetime management or CLM, achieved through digital management of the entire contracting process.
A CLM platform can lower the costs associated with employee contracts, nondisclosure agreements, vendor agreements, master service agreements, renewable subscriptions, outright purchases, and warranties. It achieves this by streamlining the negotiating process, eliminating much of the legal review, and creating a rational storage and tracking system.
The more contracts a company needs to handle, the more efficiently a business can run with CLM. The process can benefit finance, legal, sales, and creative departments.
CLM is especially beneficial for companies with a growing number of customers buying or subscribing to their products. It can mean the difference between net losses and long-term profitability from these relationships.
Lowering CAC through digital contracting
Digital contracting means using a digital environment for every step of contract management. This allows faster, more efficient collaboration across teams. It also provides a means to generate data-driven insights into how different departments handle contracts and the time and money spent during the contracting process.
Working online lessens the customary CAC expenses of phone calls, in-person meetings, and paperwork moving via couriers or the mail. It also reduces the risk of mistakes, misunderstandings, or the loss of paper documents.
If needed, company executives and legal departments with access can be looped into the process. The platform can also negotiate terms, fees, and deadlines more quickly and efficiently.
Working digitally means all parties to an agreement will have the latest version readily available, stored in a central location—the contract management software. It means the editing, revision, and redlining process is less vulnerable to uncertainty and misunderstandings.
With digital contract management, all departments create and service their own contracts. Contract workflows—the steps needed to put a contract into effect—can be prepared and followed by each department according to its needs.
CLM provides a bottom-line benefit
CLM is about the efficient use of time and money. It ends the hurry-up-and-wait aggravations associated with the movement of physical documents and allows the contract process to be scaled and automated for any company bringing in new customers. It can also make collaboration easier among all parties to a contract.
A more efficient process means less time and money spent on individual contracts, less general administrative and legal costs, and improved bottom-line earnings.
Improving lifetime value (LTV)
After a company has succeeded in acquiring a new customer, it’s all about retention and loyalty. This is where another metric known as LTV or customer lifetime value metric comes into play.
It seems to be a rule that a company searching to boost sales will have to accept increased costs. Such a company may decide to spend more on marketing campaigns and advertising. It may also have to create new contracts. Even developing a contract template appropriate for multiple customers or business partners means money spent on the origination, revision, and review of the agreements.
There are other means of driving sales and net earnings from an existing customer base. What about improving customer loyalty? This means focusing on the customer experience and searching for ways to improve it.
There are several ingredients to this effort: the best in customer service, a variety of payment and delivery options for goods or services, and optimizing any renewal or resale experience with easy, smart contracts. The payoff: an improved reputation, good reviews, and the holy grail: expense-free, word-of-mouth sales.
Improved customer loyalty means improved brand loyalty and exposure in the market. All these good things result in higher customer lifetime value, allowing the company a faster recovery of the money it spent to win the customer at the start. Better LTV means a reduced need for marketing and advertising spend, and ultimately, lower customer acquisition costs.
Achieving a shorter time to value
Digital contract management offers a road to greater efficiency and lower costs. It achieves this by detangling the negotiation process, providing a rational workflow, improving the tracking and storage of important documents, and saving on the time and expense of legal review.
The effort expended to find the right CLM platform will pay off in a shorter “time to value,” the lag between purchase and the point where CLM begins contributing lowered customer acquisition costs. The result will be profitability on the business end and enhanced customer loyalty and satisfaction.
A market leader in reducing CAC through digital contracting
Ironclad’s Workflow Designer is a CLM solution that works out of the box. Implementation time is minimal, and the simple “drag and drop” interface reduces the need for technical expertise.
A CLM solution offered by Ironclad has been adopted by companies of varying sizes and business sectors. Dropbox, for example, has used Ironclad to fast-track its service agreements and statements of work, to the tune of more than 2,000 separate agreements a year. The CLM platform has cut turnaround times on the agreements from an average of two weeks to just minutes, greatly reducing customer acquisition costs.
Using this solution, the time needed for contract generation and approval can drop from weeks or months to just minutes, providing greatly reduced customer acquisition costs. For greater insight into how the process works and how it can benefit your company, contact Ironclad for a demonstration of this CLM solution.
- Lowering legal expenses to reduce CAC
- Revising, tracking, and storing contracts
- Rationalizing the process with contract lifetime management
- Lowering CAC through digital contracting
- CLM provides a bottom-line benefit
- Improving lifetime value (LTV)
- Achieving a shorter time to value
- A market leader in reducing CAC through digital contracting
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.