In order to run a profitable business, you’ve got to get more from each customer than it costs you to attract them. Another term for this is marketing efficiency, which is the relationship between two numbers: 1) The cost of acquiring an average customer, and 2) the lifetime value of an average customer.
If you area planning your business, and haven’t launched yet, set a goal for your marketing efficiency. Once your company is up and running, make marketing efficiency one of the key performance measurements you track on an ongoing basis.
Here’s how to do the math…. Look at the numbers for a set period of time, like six months. What are the total costs of sales and marketing for those months, including marketing expenses, salaries and commissions of marketing staff? How many new customers did you attract in those months? Divide the costs by the number of customers, and you have your customer acquisition cost.
To determine the lifetime value of a customer, start by calculating or estimating how long a relationship with an average customer will last. Then estimate the amount of revenue you’ll generate per customer, over your entire relationship with that customer, and subtract the variable costs of delivering your products or services to an average customer, including the costs of service and support and the cost of employees providing the service and support.
Finally, divide the lifetime value per customer by the cost of acquiring a customer. Shoot for having a lifetime value at least three times greater than your acquisition cost.
How efficient is your marketing?