BluLeadz Inbound Marketing Blog

How Much Should You Spend To Get A New Customer?

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In order to be in business you need customers.  And in order to grow your business you need to acquire new customers.  However, you have to go about this strategically if you want to be successful. The first thing you need to understand is how much you can afford to spend on getting a new customer.  This sounds easy but most business owners have no idea what that magic number is.  In fact many business owners have no idea how much they are currently spending on advertising and marketing (yellow pages, TV, radio, internet marketing) to get a new customer.  They can however, tell you how much they are spending on yellow pages per month, and usually with disgust. 

You first need to figure out how much a customer is worth

The first step in figuring out how much you can afford to spend to acquire a new customer is to figure out how much that customer is actually worth to you.  For the purposes of this discussion we will take an average service company like a plumber.  Let's say a plumber typically charges $125 per service call.  You may say well the answer is simple, if he wants to spend 10% on advertising he can spend $12.50 to get a new customer, right?  Not so fast.  You need to dive a little deeper into the plumber's numbers to understand things a little better.  When you look a little closer you find out that while most of his calls are for $125, for every 10 calls he does he sells 2 larger jobs that average $750 each. 

So let's look at the numbers again, now for 10 new customers he brings in not $1,250 (10 customers x $125 per job) but he really makes $2,500 (8 customers x $125 per job = $1,000 + 2 customers x $750 per job = $1,500).  So the average revenue per customer is actually $250 not the $125 we originally thought.  This means that at a 10% marketing cost he can afford to spend $25 (or double) to acquire a new customer.

Time to look at the 'Life Time Value' of a customer

While the above method of determining the acquisition cost of a customer is accurate it is flawed in that it is short sighted.  It assumes that you will only work for that customer one time.  Well if you never had repeat business, you would be out of business pretty quickly.  Thus, your next step is to figure out what a new customer is worth to you over the estimated lifetime of that customer.  In other words how much do you expect to make from that customer before you lose them as a customer.

The formula for this is very easy.  You will need to determine a few figures in order to do this:

• Average revenue per customer
• Frequency of purchases in a given time period (a year for example)
• How many years do they stay a customer

If you are a new company and don't have the historical data to determine these figures then just estimate them, but be truthful with yourself about the projections.

First take the average revenue per customer, then multiple this number by the number of times they buy per year and then multiply this figure by the total number of years they will be a customer.

Using the plumber example from above it would look like this:

• Average revenue per customer:  $250
• Average number of service calls per year:  2
• Average number of years they will stay a customer:  4

$250 x 2 x 4= $2,000

So in this example we can expect to make $2,000 per customer over the lifetime of that customer.  Using a 10% marketing cost we can then spend up to $200 to acquire a new customer and still be profitable and within budget.

You may say WOW, I had no idea I could spend $200 to get a new customer.  Well that's because you never spent the time to figure it out. 

Cash Flow is King!

The only problem with spending $200 to get a new customer today is that you are losing money today to get that customer.  You make that $2,000 per customer over the next four years, not today of course.  And that assumes you are able to keep that customer for that long. So you have to have a balance (or enough cash in the bank to afford to lose money for a while) between how much you spend and how much you bring in. 

The key is to know you numbers and find the right number that you can afford to spend to get the revenue today.  Then maybe spend just a little more in the hopes that this gives you an edge over your competitors and gets you more customers over the long term.

Don't forget to spend money of your current customers

We have all heard the old saying it is far more expensive to acquire a new customer than it is to keep a current customer.  This still holds true and should be considered when planning your marketing budget.  Spend a little money on loyalty programs, referral programs, top-of-mind awareness advertising, etc.  It will pay off in the long run for you.