Every new business owner knows, or ought to know, the importance of knowing just what it costs, in dollars and cents as well as in time and effort, to acquire a new customer. Some businesses depend almost entirely on walk-in customers, such as a convenience store. Others depend solely on online customers. But no matter where customers come from, there’s always a cost associated with getting and keeping their business. This is something that has to be factored in to budgets for companies new and old, big and small. It goes without saying that a customer’s extended value — just how long they can be expected to patronize a product and/or service — is also a part of this vital equation. Without that kind of knowledge an entrepreneur is practically flying blind with any kind of a startup.
One of the biggest indicators of a business’ success is the ROI — return on investment. The ROI is often damaged by the unexpectedly high cost of customer acquisition for new companies, according to funding company Evolocity. The initial idea was great and the demand was obviously there — but then the cost of actually obtaining and growing a customer base suddenly looms up with an unexpectedly high price tag. Using pre-metrics and market research, this kind of catastrophe can usually be avoided.
How to measure the Customer Acquisition Cost
So how many dollars does it actually take to bring in a new customer? Probably the best way to make that calculation is to divide the amount spent on marketing campaigns by the number of purchasers that were brought in by said campaign. This works either for specific departments or for the whole company in general. However it makes more sense to the owners and major investors. The obvious goal is to get the CAC as low as possible without impacting product quality or customer retention and customer service.
This calculation, of course, is for first time buyers, new customers. Entrepreneurs still need to figure out what it costs to keep a customer active over a defined period of time, whether it be months or years.
Working with Customer Lifetime Value
Repeat business is the lifeblood of every company, whether new or old. This just makes sense, since the cost involved in keeping a customer is always going to be much less than in obtaining that customer in the first place. Only a fool lets new customers go from lack of planning and care.
The best way to calculate the CLV is not quite as accurate as calculating the CAC, but the information garnered is still of the utmost importance to any active business owner. Begin by figuring out how much an average customer contributes to the bottom line ear year, and then multiply that figure by the normal number of years that a customer will likely continue to do business with the company. Then it’s a simple matter of subtracting the CAC from this number to come up with an average CLV.
It all boils down to a matter of balancing the CAC and the CLV. Spending too much on customer acquisition leads to short term customer relationships instead of the long term commitment that spell money in the bank. It’s not always a cut and dried proposition. Experienced business owners all say that this is one aspect of an individual business that takes time and patience to figure out correctly.