This is one of the most important numbers in your business yet it’s often overlooked for a bunch of reasons that I’ll come to shortly. It’s shockingly common for us to speak to businesses that won’t spend £10 to generate a customer they’ll make £1000’s from and this is a precarious position to be in for too long as it leaves your marketplace wide open for savvy competitors that have done their sums.
Sales & Marketing is a cost, and like all costs business owners do their best to keep them as low as possible in the pursuit of increasing profit. Paying too much for your electricity? Find a cheaper supplier. It makes sense, but that mentality when it comes to your Sales & Marketing is dangerous if you haven’t done your sums because these specific costs directly contribute to your turnover, so if you slash your Sales & Marketing costs without proper thought you’ll slash the number of people that are going to be interested in buying from you.
None of this is to say that you shouldn’t keep costs to a minimum, but you need to know your numbers so that you can understand what your minimum cost should be. I guarantee you that your minimum cost isn’t £0 yet tonnes of businesses spend exactly that on getting new customers, preferring to sit still and hope that the phone will ring. Your website isn’t Kevin Costner’s Field of Dreams “Build it and they will come”.
Sure you’ll get some word of mouth, networking and referral customers for free, just like everyone else does but you need to understand what you’re prepared to spend to get a new customer so that you can make an informed decision on whether to acquire any more of them and to what extent that’s possible.
What’s the most you could spend to acquire a customer and still make £1 profit?
For argument sake, let’s say you make a profit of £800 on a customer and you’d be happy to spend £80 to acquire them (spending more or less than £80 is a separate argument, so just go with this for now). That doesn’t necessarily mean that you’ll spend as much as £80, but by declaring to yourself that you can tolerate a spend of up to £80 to make £800 you’re now in a position to make an informed decision on what Sales or Marketing work you want to do.
So rather than simply dismissing that Google Ads Campaign, Print Ad, Facebook Campaign, SEO Campaign, Trade Show or E-Mail Campaign etc as an easy-to-say no to cost, you can credibly say “so long as a spend of £X on this activity creates Y number of customers it’s feasible” and that is an essential starting point.
Some activity is inherently difficult to forecast especially your offline stuff e.g. advertising in print magazines (although things like call tracking numbers can help with attribution), but digital marketing activity is very transparent and you can clearly track your numbers (clicks, cost per clicks, visitors on the site, visitors that made an enquiry etc)
I won’t name any names but last week I spoke to the marketing assistant from an existing client of ours that already has a very successful Google Ads campaign with us, but there’s more that they could do. Amongst other things, I wanted them to spend an additional £50 per month at least on remarketing, as they now meet the criteria to do so and remarketing (showing ads to warm leads that have already been on your website but haven’t bought yet) is well known for providing an above-average ROI (Return on Investment). Quite simply, the CPA (Cost Per Acquisition) through remarketing is as low costs as it gets. He politely declined the offer for now saying “the directors want to put up a billboard so we have no budget for a few months.”
This particular business is a niche b2b business and unless they’re going to mount their billboard on the back of a truck and drive it into the car parks of their very specific potential customer audiences’ HQ’s with the music blaring out loud, a billboard won’t deliver much if any return on investment. It will simply be something to boast about to friends down at the golf course.
I may sound bitter, I promise you I’m not. I’m genuinely happy that they’re in the position to be a bit frivolous but I am frustrated that it’s preventing them from moving ahead with the most profitable customer acquisition activity that they’re ever likely to embark on especially when I know they’re still hungry for new business. Sadly they have the blinders on because of a deeply ingrained aversion to taking on costs especially those that they don’t immediately understand. My effort to help them or anyone else understand becomes a lot easier when the “I’m prepared to spend £x to acquire a customer” number is in mind.
I’m not unsympathetic to the fact that sometimes even when you understand the ROI, sometimes funds simply aren’t available, but you need to have an honest conversation with yourself (if not with people pitching you lead generation services) about how best to allocate the funds you do have available.
Taking the same hypothetical example from earlier, being happy to spend £80 on a customer you’ll make £800 profit on. Let’s say that 1 in every 5 enquiries you get turns into a customer. Then we’d know that if we can generate enquiries for £16 each (£80 ÷ 5) then it’s worth your while.
Taking it another step further let’s say that to get those 5 enquiries, you need 100 visitors on your website, that’s a 5% conversion rate. (Note: Landing Page conversion rates vary depending on your industry and of course how compelling your landing page is to your target audience).
In this instance as long as you can generate traffic for £0.80 a click on average (£80 ÷ 100) then this is worth your while. That traffic may come from Google Ads, Facebook or Organic SEO but either way you’ll know the parameters of spending with which you can operate.
In reality, you may be able or willing to spend more than £80 to get £800 back.
This is what those that generate more leads than they can handle understand…
All decisions should start with that number. You should start off by understanding how much customers are worth to you over their lifetime. Many people shy away from this because they offer all sorts of products & services to all sorts of people so it becomes complex.
The simplest thing to do is to work out an average even if it doesn’t represent any 1 typical customer. You can either drill down by product/service to figure out your average gross margins for each product/service or simply take last year’s profit and divide it by the number of customers that spent money with you that year. That will give you a good starting point. How to calculate these numbers is too big a topic for this blog post, but ask your accountant for help if you need it.
Try not to overcomplicate it. If you sell widgets for £100 and they cost you £50 to produce, you’ve got £50 to play with.
A real example:
Just to be clear this isn’t one of my own clients but the data here is real and came from one of my marketing groups recently. I’ve chosen to use this example as it’s a classic case of not thinking about your magic number properly.
A lady with a service-based business was running a Facebook campaign with a £15 a day budget and she was running ads over the weekends (Friday to Monday) for a number of weeks. She was concerned because she was averaging 1 lead per weekend at an average cost of £42.37 and was disappointed with that seemingly high figure. She’d heard of people in other businesses generating leads for less money.
She generated 7 leads and 3 of them became clients. So that means 7 x £42.37 = £296, which generated 3 customers at an average CPA (Cost Per Acquisition) of £99 (£296 ÷ 3).
Her customers spend an average of £300 per month, and they have an average life span of 20 months. Her gross margin is 50%. So that’s £300 x 20 months = £6000 average lifetime spend and at 50% gross margin she’s making £3000 per customer on average.
She was spending £99 to make £3000 on average which is incredible, but her mindset hadn’t properly allowed her to consider her great position until her agency pointed it out.
You could argue “so what? she knows now”, but it’s the missed opportunity cost. If she understood her numbers properly, instead of getting 3 clients over a few months, she could have maxed out her capacity to onboard new customers within that same period of time which is exactly what she wanted to do. She could’ve found that £99 to spend on each customer sooner or even better, allowed her campaign to fund itself. She makes £150 in profit from each customer in their 1st month which could then have easily covered the cost of acquiring the next one.
Figure out what you’re prepared to spend to acquire a customer and you put yourself in a powerful & informed position.
There are many reasons why people don’t know their magic number….
- Fear. People are scared to have their decision-making held to account against a real number. If they keep it ambiguous & fuzzy, they can’t be challenged.
- Ignorance. Until someone points it out, it isn’t always obvious to think like this.
- Complexity. Even if you understand that you should know this number, it may not be easy to calculate. In reality, even a ballpark figure is helpful.
- Perception of Value. Often through lived experience, some people simply have a deeply ingrained perception of value and never seek to challenge their assumptions even when it’s not based in any tangible reality. “I won’t pay £10 a click, no way” just because it’s £10 with absolutely no thought given to what it generates in return, forgetting it’s not their pocket money being spent, but a business investment.
- Complacency. Some businesses tick along nicely without ever having to really focus on deliberately taking action to acquire customers, but this isn’t success by design. It’s incidental. You may not need to immediately onboard new customers if you have enough on your plate, but if you don’t know what would be involved in a quantitative way you’re in a vulnerable position should something change (and sooner or later it will – pandemic or recession anyone?).
- Busy. Some businesses are busy without having to proactively market themselves much if at all, but these businesses often lack the freedom to choose better opportunities and have to take what comes their way regardless of its suitability, which is a hard to cycle to break. Whilst you’re servicing the clients you had to take at the time, you’re not in a position to seek better opportunities through your own lead generation work. There may be easier to deal with, higher-paying clients that you don’t even know exist.