So once you’ve determined your customer’s lifetime value, the next step in building your marketing formula is to determine who much you can spend to acquire a customer.
Why is this metric important? Most business owners have no idea of what to spend to acquire a customer, or what a realistic customer acquisition cost is.
Businesses that have grown on word of mouth typically pay very little for new customers, so are not in the habit of looking at how much they SHOULD be spending to gain new business.
So many businesses that are trying to grow are NOT spending enough money on their marketing. However, if you don’t know where to start, how could you possibly know what is enough?
Determining Customer Acquisition Cost
This metric is relatively simple to determine once you have the customer lifetime value number.
Let’s say your average customer lifetime value is $50,000.
As a quick review, remember that your customer lifetime value is average purchase price x # of times a customer would purchase (same or similar product) in a 5 year period. So if your average widget price is $10,000, and they buy 1 a year for 5 years, $10,000 x 5= $50,000 lifetime value.
If you have recurring agreements, then the formula is average monthly revenue x # of months a customer stays with you (up to 60, which is 5 years). So if your average monthly revenue is $1,000, and someone stays with you for an average of 3 years (36 months), $1,000 x 36= $36,000 Lifetime value
Once you have this number, you need to ask what yourself…
What am I willing to pay to acquire that customer?
Where most companies get into trouble is that if you are used to growing on referrals or repeat business or word of mouth, you’ve paid very little if anything for that customer. Proactively growing your customer base from strangers is a COMPLETELY different ballgame.
A good rule of thumb for customer acquisition cost is 10% of your customer lifetime value.
So if your customer lifetime value is $50,000, 10% is $5,000.
You may want to sit down.
But there is another side to this equation.
Here is what you may not have considered….
What if that one customer brought you their $50,000 of revenue, and a referral? Or 2? That’s over $100,000 for $5,000. That’s a pretty good investment.
Also, what if this customer buys other goods and services from you? There are other ways to grow that revenue stream as well. Look at the potential as well as the customer acquisition cost.
Marketing is generally area where businesses look to cut back or save money, and that is part of why they fail.
Consistent marketing is a game changer between waiting for the phone to ring, and bringing in a more consistent stream of customers. It isn’t perfect, but it is real.
Now, when you’re looking at your marketing results, please know that to try and measure this on a month to month basis is not a realistic overall view of your marketing.
You may have someone who contacts you in month 1 of a marketing campaign, but they don’t buy until Month 4. Does that mean that Month 1, 2,3, or 4 failed? Absolutely not. But that is another blog within itself. How to measure my marketing
What’s My Next Step?
If you’re confused by any of the marketing metrics we’ve outlined here on our site, give us a call at 708-403-5509 and ask for Jennifer. She will guide you through determining the marketing numbers to build your marketing budget, as well as a game plan for actually acquiring customers. You can also email us at email@example.com .