Guest Post by Thom Holland
Do you want to know the number one secret for my business success? …..all of my businesses make more than they spend.
Of course, right?
In all seriousness, your business success will depend on your ability to make more money than you spend. And in order to accomplish that, you’re going to need a solid understanding of customer acquisition costs.
Often times, when speaking with first time entrepreneurs, I realize that they’ve never even heard the phrase “customer acquisition costs”.
If that’s you, I wouldn’t sweat it.
Here is some insight to help you get started.
So what are we talking about?
Before you layout your marketing and sales process, there are essentially two terms that you’ll need to understand really well in order to be effective.
These terms are “customer acquisition” and “customer lifetime value”.
- Customer Acquisition Costs - refers to how much it costs your organization to get one client. In most cases, you’re either going to do some sort of advertising or simply buy out another company. In either case, you should be able to calculate how much it cost you to acquire one client.
- Customer Lifetime Value - when I was in business school, people seemed to struggle with this particular term for some reason; I think because they got a little overwhelmed when terms like “net present value” and “cash flows” were introduced. Nevertheless, there’s no need to be overwhelmed. “Customer lifetime value” simply refers to the amount of money you will make from a client over the long haul.
Here is a quick visualization of how you would actually calculate your customer acquisition costs and customer lifetime value:
How do these terms correlate to business success?
There’s an easy answer to this question; if your customer acquisition costs are higher than your expected customer lifetime value, you will eventually fail.
It really doesn’t matter how good you are at generating leads or how effective your sales process is, if you want to achieve business success you need to make more than you spend.
It’s as simple as that.
Lower customer acquisition costs and increase lifetime value
The ultimate goal here is to lower your customer acquisition costs and increase the amount of value you can capture from your customers.
Of course, that’s often easier said than done.
We could go pretty in-depth here on the details. However, for most small businesses, here are the most realistic ways to lower your customer acquisition costs:
- Improve your marketing - while this isn’t typically the case in every situation, inbound marketing typically provides a much better ROI than traditional outbound marketing practices. If possible, try to find ways to get your business online.
- Improve your sales process - once your marketing efforts start generating leads, you need to efficiently convert those leads to sales through your sales process. To do this, you’ll need a sales process that you can continually optimize and evolve. Keep in mind that, in many cases, employees are what drive up your sales costs.
- Strategic partnerships - another viable option for most small businesses is to find strategic partners. Try to seek out and find situations in which there would be a win-win for all parties.
Likewise, here are the bullet points on capturing more value from your customers:
- Recurring revenue - I can’t stress this enough; recurring revenue is incredibly important to small business success. Clients who pay on a monthly basis are clients that you don’t have to market to.
- Customer service - once you land a recurring client, the idea is to have them be a client for as long as you can. To accomplish this, implement a customer service process and simply listen to what your customers are telling you. At the end of the day, exceptional customer service can result in explosive sales growth if done correctly.
Growing a successful business can certainly be a challenge. The trick, however, is to have the patience for due diligence and the drive to actually make things happen.
Don’t put your heart and soul into your business, only to get down the road and realize that you’re not making more than you spend.
Find ways to lower your customer acquisition costs and increase the amount of value you capture from your customers.
How does your organization’s numbers stack up to others in your organization?