How much is a new customer worth to you? Let’s talk about customer acquisition. The truth is whoever’s willing and can afford to spend the most to acquire a customer wins- not the company who has the best product or service. Many small businesses are scared to spend money on advertising, and that’s because they don’t know how to calculate their customer acquisition cost. They also probably haven’t figured out how much a new client is actually worth to their company (their life time value- not just a single sale.)
If you are not spending the maximum amount your company can afford on advertising then you are not scaling your company at the maximum rate- and essentially leaving money on the table. So how do you figure out how much to spend?
- Figure out your average customer’s lifetime value, Total Revenue divided by number of customers. So if you have $100,000 in sales and a 100 customers, then each customer is worth $1000
- Minus your cost of goods (include everything is this number, payroll, utilities, product costs, refunds ect.) if it costs 20,000 in expenses to run your company divide that by your customers (20,000/1000=200) now take that away from your customer worth. 1000-200=800
- So if you were to spend $800 per customer on advertising per year then you would be breaking even. Obviously the point of business is to make profit, so how much profit do you want to make off each customer. Let’s say it’s 60%. Then you can afford to pay $320 to acquire each customer.
How do you apply this to your business?
Out of 10 leads (people who inquire about your product or service with their contact information) how many of them are you able to close? (Figure this stuff out if you don’t know, you need to know your numbers.) Say it’s 10%, then you know you can afford $32 to obtain a lead.
There are lots of ways to obtain leads, but I’m going to apply this to an online sales funnel. Say you have a Google Ad sending traffic to a landing page designed to collect contact information from your lead, (enter your email and get a discount, for example) and that landing page converts 40% of visiting traffic. Then in this example you can afford to pay $12.80 per click.
For this scenario to work it’s crucial that you have an online lead generation system built- a way to gain your prospect’s contact information, you don’t want to waste money on a click that has little chance of converting. In the simplest explanation a lead generation system must have a traffic source (Facebook, Google, Pinterest ect.) Then there needs to be a way to collect a prospect’s contact information, an ad that points to a landing page with some type of gated content.
I’m going to keep it real- the first time you build a lead generation system it will probably fail. Our agency spends up to 3 months testing our online sales funnels. Don’t invest your maximum advertising budget until you have a system that effectively converts! I go into depth about the 6 step process I use to create an online lead generation system here.
You can also apply this formula to other types of marketing. For example if you’re debating on going to a trade show and paying for a $3000 booth, consider how many attendees there are and whether or not you expect to collect 93 leads?