Customer Acquisition: How Much Spending Is Enough or Too Much?
budgets, customers, sales, spending, value
Let’s face it, whatever your business is, no matter what goods or services you may offer, there is no question that you must have customers. Whether you are just starting out as a new franchise or a well established business with branches around the world, your customer base is what makes the difference in your level of profitability. It makes good sense, therefore, that customer acquisition be given the proper level of authority as well as respect. What does that mean?
It means the most critical question you can ask yourself regarding customers is:
How much can you afford to invest in the acquisition of a new customer?
When you can answer this question in a realistic manner that does not take your budget into the dungeons of inadequacy, you have arrived at the point where you will be able to acquire new customers when you need them without sacrificing budgetary amounts that have been designated to other necessary expenditures. This is often referred to as the lifetime value of a customer, which can be expressed as a formula for ease of understanding:
LTV = Purchasing Frequency x Length of Loyalty x Gross Profit
Ask yourself these important questions to help determine the lifetime value of your customer:
With regards to purchasing, how often does your customer buy from you?
What is the frequency of purchases?
How long has your customer been loyal to you?
What is the amount of profit you realize on an average order from the customer?
The average of these questions can be plugged into the LTV formula above and will give you the value of the customer in terms of lifetime gross profit. Now you have a precise way of determine just how much spending is enough in terms of acquiring a new customer what amount crosses the line and is too much. This knowledge is also helpful in determining if your overhead is too high and if customer retention is an issue. Both of these factors can greatly influence the equation.
Remember that, as a rule of thumb, you should not spend more than 1/3 of your LTV to acquire new customers. Also bear in mind that the cost to acquire a new customer is around five times greater than the price of retaining an existing one.
