What should it cost to Acquire a Customer?

What should it cost to get a new customer on board? “It should cost less than it costs to produce your product and sell it to the customer” seems like an obvious answer. Unfortunately, or rather fortunately it is not as simple as that.

Logic dictates that when I want to sell a product for $10, I need to spend less than $10 dollars to sell and produce that product in order to make a profit. However, following this logic means we are oversimplifying the process and missing out on potential profits. So, if this oversimplified way of looking at things is causing us to lose money, how much should we spend to acquire a customer? Well the answer is easy:

The amount you spend acquiring a customer should always be less than the Lifetime value of that customer.

Let’s break it down further.

What is Cost per Acquisition?

Cost Per Acquisition (CPA) is a marketing metric that measures what it costs to acquire one paying customer.

This metric is usually compared to the price of products to determine the success of marketing campaigns. While this measure could provide value and improving this number should improve your bottom line this should not serve as a measure of success for marketing campaigns.

What is Lifetime Customer Value?

Customer lifetime value (CLV) refers to the total amount of money a customer is expected to spend in your business, or on your products, during their lifetime. This is calculated by multiplying the Customer Value (Average purchase value of a product x Purchase frequency rate) with the Average Customer Lifespan.

This metric is a much better indicator to measure your marketing campaign success against. Consumers are becoming more informed and have more information available to make their buying decisions than ever before. This means companies who want to be top of mind need to ensure that they have multiple touch points that reaches their customers.

This in turn could push up the cost per acquisition and lead to you missing out on customers and profits if you do not account for the Lifetime Value of your customers.

The Exceptions?

Customer Lifetime Value will vary depending on the price of your products and the purchase frequency rate of the products. This means that if you sell a product that a customer only buys once it is important to keep your Cost per Acquisition under the price of that product.

However, if you sell a product that requires a subscription fee or is frequently bought by customers, for example cleaning products, beverages, etc., the cost per acquisition must be less than the lifetime value of that customer.

In Conclusion?

The lesson here is that although we can derive major value from our marketing metrics in this big data age, we must be careful to not over analyse these metrics.

The first transaction with the customer might be recorded as a loss but if that transaction is completed with competence and we can create lifelong relationships with the new customer, we will only grow our businesses.