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Investing enough in Customer Acquisition?

author

Kevin McSpadden

date

Jun 25, 2019

read time

7 minutes

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Every business has one major source of revenue: its customers.

Customers drive profits and are the economic unit by which a business measures its success. In order to generate profit over time, our mission, therefore, is to keep our customers loyal and to acquire new ones.

 Because they’re worth it

The other day, I asked a new client what a loyal customer was worth, to his business. Initially, he didn’t know, but he was amazed to discover that each one brings in more than £500 profit per year!

I then asked a better question: ‘how much do you spend to get new customers?’ He made a quick calculation: dividing the marketing cost spent on gaining new customers by the number of new customers achieved. He was shocked to find out that they spent less than £50 per customer.

Although that might sound like good news, he recognised something important – he could afford to invest more in new customer acquisition and grow them, which would not only increase sales and profit in-year – but for many years after. And those new customers would tell others, so that his business becomes more widely known and sales grow even faster.

He realised that he had, in fact, been inhibiting the growth of his business because he didn’t understand the relationship between investing in customer acquisition and the return it gives. A very expensive mistake, considering all the extra customers and profit he could have made, if only he had he been willing to spend a little more to acquire them.

Why did he ignore this massive potential? Because he was focused on efficiency, rather than profit. Of course, you want to recruit new customers efficiently – but you don’t want to miss out on profit, surely?

This business was happily paying £1 to gain £10 but had balked at the thought of investing £2! Over time, this decision has cost him millions in profit.

Invest to grow

In my 17 years in the business, I have seen very few businesses get this right.

Put simply, your job is to decide how long you are willing to wait to break even – for example, if a new customer is worth:

  • £25 profit on their first order
  • £40 after 3 months
  • £50 after 6 months
  • £70 after 12 months
  • in this example, if you spent £50 per head on acquisition – 6 months is your maximum break-even point.

Decide on your own – and set that target for your team. Spend as much budget as possible to grow your customer-base as fast and profitably as possible.

The right approach

Understand the lifetime value of your customers – the return you gain, over time. Then, align your marketing activity with the maximum cost you are willing to spend. This is the single most important figure in your business. This ensures that your marketing investment has a clear expectation of your likely return, over time. As a result, you will maximise growth and profit.

How do you get it right?

(a) know your customer lifetime value

(b) align your customer acquisition investment and measurement to your customer lifetime value

(c) don’t measure marketing solely on ROAS (return on ad spend) or ROI

(d) regularly measure the number of new customers you acquire.

In short, appreciate the cost of customer acquisition as the key to unlocking extraordinary growth. And understand the cost of not knowing. Can you afford it?

 

author

Kevin McSpadden

date

Jun 25, 2019

read time

7 minutes

share