Cost of Acquisition
It’s time to take a look at Customer Acquisition Cost. This is another fundamental bit of financial maths that will determine your financial success or failure online.
Let me carry on with the model of a £20,000 Lifetime Customer Value. Obviously, if your figures are different to this, you need to modify them. However, I’m going to stick with the figure of £20,000 Lifetime Customer Value. So, if I spend £20,000 acquiring a customer, is that a good move or a bad move? Of course it’s a bad move to spend as much acquiring a customer as you’re about to make in profit.
Previously, you might have heard of people trying to build Market Share etc. I don’t believe in that for Online Marketing. Things are moving extremely fast in the modern day, so focusing on Market Share is not something that I suggest you do. I want to help you to build up your profit and therefore help you create your financial success online.
Imagine that acquiring that customer is going to cost £30,000, well that is an absolute no go, but what if they’re £10,000? Is it a good move for you to spend £10,000 acquiring a customer who will bring you £20,000 in profit? Without taking any other factors into consideration, if you can have somebody sell you a customer for £10,000 that you will generate you £20,000 in profit, then that’s doubling your money. If there’s anybody out there who has a system which can double your money, I’d really like to know about it. That’s exactly why we need to learn about Lifetime Customer Value and Customer Acquisition Costs so we know what it is going to cost us and if it is good value.
Now I did say that there are some other factors, so let’s actually have a look at those factors now. If we spend £10,000 to get a new customer, that’s fine, but what about their Spend Profile? I encourage you to have a look at what their spend is, because if our customer spends £1,000 a month with us, for 20 months, it’s going to take 10 months for us to get our money back. If we spent £10,000 on day one, and they spend £1,000 with us, then we’re £9,000 down. A month later we’re £8,000 down and you can see how that all works. After 10 months we’ve got all of our money back and they’re still going to be paying us £1,000 a month. As an example that’s exactly how Mobile Phone Operators work on these models and it works for them because they can cash flow the situation. If you can cash flow situations like this in your business then that’s great. However, for most of us, we’re going to really need to look at how that works and how much we can afford to spend before we get the return back.
I want to have a look at all of that in relation to “how does that affect our Online Marketing?” Let me give you an example. If we were going to use Google’s AdWords; or the Facebook Ads; or LinkedIn Ads, then they’re going to charge us every time somebody clicks on the Advert. We’ve calculated that it is a good way to attract new business, especially because we can control our costs.
Let’s say an Advert will cost us £1 every time somebody clicks on it. However, it could take a 100 clicks, let’s say, to get an inquiry. So it costs us £1 and takes 100 people to click on the Advert before we get one inquiry, which then tells us that an inquiry is going to cost us £100. Different figures will need to be worked out for your business and you should put some time aside you make these calculations.
If we need 4 enquiries to make one sale and the inquiries are costing us £100 each because we need 100 clicks, then each sale is going to cost us £400. Now, that’s fine if we’re looking at the £20,000 Lifetime Customer Value, because what happens here is on month one, we have already made a profit, but it may be too high a spend in your business. In knowing your numbers, you understand how much you can spend on Google, or Facebook, or LinkedIn, because you’ve worked out your Lifetime Customer Value and your Acquisition Cost.
If you have a new business, it’s going to be forecasted and I understand that is always difficult. You can use all the Analytics Tools that you like, yet there will still be some guesswork, and I understand that. If you’ve got an existing business, the chances are you’ll have some of this data to start working with.
Later on, we will discuss how you can improve your conversion rates and bring down your Cost of Acquisition, but at least you’ve now got a starting point. Go away now and work out your Customer Acquisition Cost, whether that is your existing experience, or whether that’s the forecast for what you’re about to do.