Sales and Marketing - Jen Jordan

Customer Acquisition Costs, Lifetime Value, And Your Marketing Strategies

Your customer acquisition cost (as the name implies) is how much it costs you to bring in a new customer or client. You can calculate your customer acquisition cost by dividing your total marketing expenses by the number of new customers you acquired within a specific period.

Your customer acquisition cost is the amount of money it takes to convince someone to buy a product or service from you. It includes your marketing, research, and accessibility. This metric is increasingly important as it helps you determine two things: what marketing strategies are most beneficial and how much it costs to acquire each customer.

A related number to consider is the lifetime value of a customer. It’s the total worth or net profit of a customer to your business. The easiest way to determine the lifetime value of your customers is to calculate the average order total and multiply that by the average number of purchases a customer makes from you. Or you can calculate the average amount a customer spends at your business each year and multiply that by the average number of years a customer shops at your business.

Why Customer Acquisition Costs Matter

Many companies track these two metrics individually. However, in recent years, businesses started assessing these numbers in tandem to calculate the overall value of their customers and determine the return on their marketing investment.

In short, it’s critical for a business to know the lifetime value of a customer so you can determine how much of your valuable resources to allocate to customer acquisition (marketing).

It’s also essential for small businesses to dive a bit deeper and calculate the customer acquisition costs for each of your marketing channels or strategies so you understand which ones are the most effective and affordable.

How Customer Acquisition Costs and Lifetime Customer Value Connect

Used together, the customer acquisition costs and the lifetime value of a customer can help shape your overall business and marketing strategies. Here’s an example:

Suppose you own a piano tuning and repair company. Your "bread and butter" service is your basic piano tuning service for personal pianos. Your "starter offer" (how you get new clients to make an initial purchase) might be a complimentary piano key cleaning with your first tuning.

Let’s break that starter offer down by price. Hypothetically, your loaded cost is about $70, including time, vehicle wear and tear, materials, etc., and you charge $149 for the piano tuning. If you want to earn a net profit of 20% ($30), that means you have $49 leftover to cover any overhead, marketing, and other costs. You’ll need to keep your customer acquisition costs under $49. Depending on what kind of market you’re in, that might be a very challenging marketing task!

However, when we factor in the lifetime value of a customer, the numbers might change a bit. Suppose 75% of your customers bought additional services or paid for regular piano tunings after the initial appointment. In that case, you’ll probably be able to afford to break even–or even lose money–on that "starter offer" (and associated marketing) for the sake of winning a valuable long-term customer.

But to take that calculated risk, you’ll need to understand how much it costs to acquire a new customer and the lifetime value once you have them.

No matter what kind of business you have, you can use your customer acquisition costs and the lifetime value of a customer to support or adjust your marketing strategies and tactics. Every small business should use these metrics to determine how much to spend on marketing to new customers vs. focusing on customer retention.

Works Cited

https://www.huify.com/blog/acquisition-vs-retention-customer-lifetime-value

https://www.wordstream.com/blog/ws/2019/01/10/cac-vs-clv

https://landerapp.com/blog/customer-acquisition-cost/

https://ducttapemarketing.com/understanding-customer-acquisition-costs-customer-lifetime-value/