Video Transcript

So if I were to think about the metrics I would focus on as a leader of a business, especially in times where the economy is a little bit tough or things are a little bit uncertain, I would really focus on costs of customer acquisition and customer lifetime value.

What’s important when you’re when you’re calculating cost of customer acquisition is that you’re including all in costs. It’s your all in sales, plus you’re all in marketing divided by the amount of customers you acquired over a certain time period. And when I say all in, I mean your technology fees, the salaries of your team, the ad campaigns, creative.

If you’re looking at, let’s say, $500,000 spent on sales, $500,000 spent on marketing, and you’ve acquired 100 customers over a period of one quarter. You’re looking at $10,000 cost of customer acquisition. So why is this important? And like thinking through the lens of metrics that matter right now, what I would be doing is really paying attention to the trends of your cost of customer acquisition.

If you’re evaluating this, depending on the type of business you have and the volume of customers you’re acquiring, you could be looking at this on a monthly basis, quarterly, annually, if you have fewer customers
that you’re acquiring over the span of a year.

Is the metric heading in the right direction? So if you see it going from 10,000 to 15, why is that? Are you landing a larger customer that’s harder to acquire or are you getting to a place where your team’s maybe a little bit less efficient or your your spend is less efficient, effective? You should really be asking yourself after you get to that number, what is actually acceptable for you.

So if you’re feeling a little stuck and wondering how you’re performing with your cost of customer acquisition, you’re just like wondering is this is this number good? What I would encourage you to do is start to compare that to the lifetime value of a customer.

And to get to that, you need to take the purchase value of a customer and times that by the number of purchases, say, in the span of one year. And then multiply that by the life span of a customer and you have your lifetime value of the customer. In the example earlier, if you have a $10,000 cost of customer acquisition and you end up with, say, a $10,000 customer lifetime value, you’re in trouble.

You need to have a better performing customer with higher lifetime value or you really need to look into lowering your cost of customer acquisition. Some things I would look into if you’re if you’re not super happy with that ratio and that example, it’s 1 to 1. The categories to explore are there’s a ton of them, but an easy place to start, which everyone knows it’s a lot easier to retain a customer than it is to acquire a new one.

So what can you do inside of service and sales and product, whatever it may be to to continue to serve a customer for a longer time period, encourage more purchases, increase the satisfaction of your customer.

Bain did a study that suggests that even a 5% increase in customer retention can lead to 25% to 95% higher profitability. So it’s a lot of times natural for leaders to look at trying to aggressively lower a cost of customer acquisition when in reality you can take that same effort and look into how can I improve my service, delivery, whatever the things may be, so that you can increase just the retention of a customer and your ratio will quickly balance out.

Now, if you look on the other side of the coin on the sales and marketing side, what can you do to be more efficient? Can you work on your positioning, your sales training, whatever it may be to help to lower that customer cost of customer acquisition?

And depending on the business you’re in, you also may be considering like, are we targeting the right customer or do we have an opportunity to increase the value of a customer by exploring new segments of customers that would help to really encourage a higher lifetime value?

Now that you know what your cost of customer acquisition is and you’ve done the work to understand how that compares to the lifetime value of a customer. What I would do is — I will give you a few benchmarks to consider. One thing to consider is it’s a typical rule of thumb, is that you want to have a one year payback period on your cost of customer acquisition.

Another thing to consider, and this isn’t true for all businesses, but a 3 to 1 lifetime value to cost per customer acquisition ratio. It’s considered really good. Now, if you’re lower than that, you really need to start to look into some of the things I was saying earlier with improving the value of a customer or lowering your cost of customer acquisition.

And if you’re higher than that, that that could be fine for your business. But it does suggest that you — say you’re at 4 to 1 or 5 to 1 or even higher in that ratio that may mean you’re actually leaving customers on the table.

And you can look at investing more into your sales staff, your marketing team, marketing campaigns, whatever it may be, and acquire more customers. Your cost of customer acquisition may go up, but that may lead to a larger customer growth and balance you back out toward that 3 to 1, 4 to 1 lifetime value to cost t0 customer acquisition ratio.