The Importance of Knowing Customer Acquisition Costs For Small Businesses
As the owner of a growing business, there’s no question you put a ton of effort into growing your customer base. It’s hard to be as effective as possible doing so without arming yourself with the right statistics. Before launching your next marketing campaign, it’s important to crunch your customer acquisition cost and customer lifetime values. With these, you can target customers who will give you the biggest boost to your bottom line. Never looked at them before? Don’t worry, it’s easy stuff!
Why is it important to understand these metrics?
Without the right information by your side, choosing your next marketing campaign will be like taking a shot in the dark. Different types of customers bring different value to your business – it makes more sense to target the ones who bring the biggest bang for your buck with them. It all comes down to your return on investment (ROI).
Measuring Customer Acquisition Cost (CAC)
Simply put, customer acquisition cost is the amount in dollars it takes to bring on a new customer. The easiest way to calculate it is to divide the total spend that goes towards acquisition (usually marketing expenditure) by the number of customers that were acquired. This can be done for independent channels, the whole company, or however you see fit. The lower your CAC, the more effective your acquisition process is – do your best to drive this number down.
It’s important to note that this number only reflects the customer making their first purchase. That leads us to figuring out what their value is over the entire business relationship.
Understanding Customer Lifetime Value (CLV)
Getting customers in the door is great, but keeping them coming back is even more important. In fact, a 5% increase in customer retention can increase profitability by 75%.
Calculating customer lifetime value is also straightforward, but requires a little more guesswork than with CAC. Start by taking the annual profit contribution per customer and multiply that by that average number of years they will continue doing business with you. You can then subtract the CAC from this to get your CLV.
Finding the right balance
So, what’s more important, CLV or CAC? It’s all about finding the right balance between the two. If you devote too much attention (and funds) into acquisition, but your business model isn’t ideal for repeat clients, then your CLV will suffer. You may be better off focusing on your existing client base to boost your CLV.
At the end of the day, you’ll need to figure out what suits your business best, but you can’t do this without a thorough understanding of these metrics.
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