How Much Will You Pay for a New Customer?

Understanding customer acquisition cost, churn rates, and lifetime value. 

Scott Bell started his company in 2008. Originally specializing in billboard marketing, his company has evolved a great deal alongside emerging trends – namely the dawn of the digital age. Four years ago, he sold the traditional billboard aspect of his business to start fresh as a digital marketing firm.

Now armed with more than a decade of marketing experience and responsible for the continued success of Bell Media, Bell shared his secret to success with us at our January Signature Series Luncheon.

The foundation of his presentation was simple: hope is not a strategy.

It makes sense, doesn’t it? So then why does it feel like such a profoundly novel ideal?

Bell has worked with hundreds of small businesses over the course of his career, and in doing so, he noticed a concerning trend: many small business owners subscribe to hope as a strategy for creating a budget, marketing their businesses, etc. Part of that, he admits, comes from a lack of understanding about the marketing industry as a whole. However, simply by developing a knowledge of the metrics used to measure marketing efforts can make all the difference. Once you identify the statistics that demonstrate measurable results for your marketing efforts, you can have confidence in the strategy used to grow your business.

The questions he recommends asking (and seeking the answers to) are…

  • How do I create predictable revenue growth?
  • How much should we invest to grow at X%?

Much of this probably sounds like common sense. The hard part is dedicating the time and energy to really seeking out answers. Knowledge is power, Bell reminded us.

In exploring alternative strategies besides hope, he also was quick to point out that buzzwords and trends are not a strategy either.

Many businesses, when developing a marketing strategy, turn to the internet (which, admittedly can be a good resource if used responsibly). However, in searching for guidance on marketing strategy to grow a small business, many identify the current trend or buzzword and quickly begin throwing money at that strategy without taking the time to understand how that concept applies (or doesn’t apply) to their business. For example, the U.S. Small Business Association recommends spending 7-8 percent of your gross revenue on advertising and marketing. That’s a stat you’ll find pretty quickly online. But marketing is not one-size fits all. Blinding choosing to spend 7-8 percent on marketing doesn’t factor in aspects of an individual business like its industry, lifecycle, margins, growth rate, market competition, etc.

For some companies, spending 7-8 percent on advertising may make sense. On the other hand, though, companies like Oracle, Mindbody and Salesforce spend nearly HALF their revenue on marketing efforts.

So how do you identify the best course of action for your business?

Bell walked us through some of the basic building blocks he uses when developing his own marketing strategy – all of which are metrics-based. You can put faith in metrics, he said.

Customer Acquisition Cost (CAC)

Customer acquisition cost is determined by identifying how much your company will spend to acquire a new customer. Bell’s formula? Take the total amount you’ve spent on marketing campaign and divide that by the total number of new customers gained over that period of time.

Churn Rate

Once you’ve identified the customer acquisition cost, it’s important to take into consideration churn. Churn is the term used for repeat customers – customers who continue to do business with your company.

Lifetime Value (LTV) of a Customer

Once you know your customer acquisition cost and churn rate, you can use that to find the value of a customer for your business by dividing the acquisition cost by the length of time that customer spent doing business with your company.

The ultimate goal is to strike a healthy balance between the lifetime value of your customers with the amount you spend to acquire them. Your LTV:CAC ratio, if you will.

Important note: what’s considered a healthy LTV:CAC ratio will vary by industry.

A Practical Application

What do you do if your lifetime value of a customer isn’t high enough to justify the cost you invest to acquire them? When faced with this challenge himself, Bell found a solution by working to improve churn and increase the amount of revenue generated by each customer (i.e. creating bigger accounts).

Bell doubled down on training, increased the minimum investment of his target customer and invested more heavily in his customer success team to improve client experience (and increase retention).

Understanding metrics like the lifetime value of a customer not only shaped Bell Media’s marketing strategy but its internal processes. The metrics and measurable outcomes created more predictability for the company and instilled more confidence in its leaders as they identified the most effective ways to invest and grow the company.

The ultimate takeaway from Bell’s experience? Hope is not a strategy – metrics are.

At AMA, we have the privilege of gleaning wisdom from a variety of marketing professionals like Bell. Thanks to their insight, Birmingham’s marketing (and entrepreneurial) community can be better prepared—both as individuals and on behalf of the companies and organizations we seek to represent, serve and grow.

 

View presentation slides — [ CLICK HERE ].

 

Review business resource links — [ CLICK HERE ].

 

Interested in more marketing insights from successful executives in our community? Check out our next Signature Series Luncheon in February. Visit www.amabirmingham.org for more information. To find out more about Bell Media and Scott Bell, visit https://www.gobellmedia.com/.

 

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