How do you figure out what you should spend to acquire a customer?
Maybe you have a well-established CRM system that spits numbers out for you. Maybe you’ve calculated the lifetime value of different customer groups. If that’s the case, you can stop reading.
Some of you will say you were given a number and told to run with it. And the truly honest of you will confess you have no idea what you can afford to spend on acquisitions. You just do what you can to get the biggest bang for your buck.
Those in the latter category have my sympathies. My guess is you’re the majority.
Lifetime customer value is the more popular method, in my experience, for determining acquisition costs. But there are so many reasons why the determination just doesn’t get done. Finance types and marketers alike are tripped up by the fact this number is a continually moving target. Defining “lifetime” can be confusing. And too often, marketers aren’t privy to detailed financial information.
It’s no easy task to determine what you can spend to acquire a customer. That must be why so many of us spend our acquisition budgets each month without knowing for sure if we can really afford the very customers we’re acquiring.
That doesn’t mean you shouldn’t try to determine the value.
What are the options when financial data are unavailable, time is scarce, and support from the top is nonexistent? If calculating lifetime customer value is out of the question, what’s a marketer to do?
For starters, buy some doughnuts and prepare to settle for less-than-ideal-but-better-than-flying-blind. Take those doughnuts to the accounting department. Explain your predicament and request one tiny piece of information: the company’s overall profit margin.
Applying an overall profit percentage to every customer is far from ideal without factoring in product mix, customer service costs, and so on. It isn’t very different from using revenue alone. If your profit margin is 3 percent across the board, all $1,000 customers look equal based on revenue. It appears they each generate $30 in profit. You miss the opportunity to recognize some customers generate more profit than others, even when revenue is the same.
But it’s better than nothing and can help you when you’re desperate to evaluate acquisition costs.
Continuing with the example above, you know on average a $1,000 customer generates $30 in profit. That means a $100 customer generates $3 in profit. Now you can compare that to what you spent to acquire the customer. If you’re getting a lot of $100 customers, common sense says you probably shouldn’t spend $25 to acquire them if you only make $3 in annual profits. So until you have a more exact method, you can adjust efforts accordingly.
Another way to look at it: Say your company’s overall profit margin is 10 percent. That means for every $100 of revenue, the company makes $10 in profit. Last month, acquisition costs averaged $20 per customer. How much do the new customers spend in their first month? If it’s $10, you’re on the road to recouping costs and making a profit. If it’s $1, maybe not so good, unless you know most new customers stick around and invoice size usually goes up in future months. The more additional information you can factor in, such as percentage of return visits or average invoice size in future months, the more accurate your evaluation will be.
It’s especially helpful to extend this exercise to the campaign level and segment by customer group simultaneously. Separate one-time from repeat users. Separate based on demographics if that’s relevant to identifying a good customer. Perhaps order size is more important in your business. If you can segment your customers in any meaningful way, you’ll get even closer to a true picture of whether your acquisition costs are reasonable.
A third exercise: Knowing your overall profit margin allows you to guesstimate how much revenue customers must generate for different goals to be achieved. Goals will vary based on what you know about your business. How would your customers need to behave for you to break even in the first year? Is that behavior reasonable? You can adjust goals accordingly. Look at what it would take to break even in different time periods or to turn a profit by a certain date.
I’m not surprised anymore when I meet marketing (and finance) folks with no idea if their customer acquisition costs are reasonable. Many are much more focused on campaign optimization. For whatever reason, too many marketers are flying blind. Maybe this baby step will help more of you make better decisions. An additional benefit is often increased cooperation from the powers that be, once they see the logic behind your efforts. If you’re persistent, maybe, just maybe, you’ll end up with the resources and support you need to establish lifetime customer value.
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