Questions

How much should a business spend on customer acquisition?

In trying to determine whether to countinue advertising through a certain channel, it helps to know what the "standard" is for how much should be spent per customer. Should it be 100% of net profit for the first sale? Should you be making profit even after accounting for the cost of acquiring the customer? How long should it take for a customer to become profitable?

3answers

To answer this, you need to have a working model for your customer LTV (Life Time Value). Most startups can't accurately estimate their LTV, so if you don't have good enough data, then building your CAC based on assumed LTV numbers can be fatal.

In this case, it's better to evaluate your CAC costs based on the months of revenue it takes to recover the cost to acquire the customer, and ultimately this calculation should be net of any costs associated with providing the service on a monthly basis and, even more conservatively allow for a healthy degree of churn.

Keep in mind that this calculation doesn't evaluate your true profitability only the capital efficiency of your customer acquisition spend.

Hope this helps. Happy to talk this through in more detail and with more specifics to your business.


Answered 6 years ago

I like to look at what's known as "Customer Lifetime Value." Now, if you do not have any customers, this can be a bit difficult to come by. For me and my businesses, I'll pay up to 75% of the CLV to acquire a new customer.

So, for example, for this particular business (See screenshot: http://screencast.com/t/aMHBTGKBH7O), during our September/October launch, I determined that our Customer Lifetime Value (CLV) was $3,936.32.

Once I had this number, I was able to spend 75% of that amount on things like PPC and Affiliate/Referral Partner traffic to acquire more customers (Knowing full-well that I had 25% profits in store). I was able to go forward confidently with my marketing as I had already "done the math" behind this figure.

I give up to one (1) year for a customer to become profitable. However, using some of the strategies I employ, 90% of the time, I can acquire a customer and become profitable within the first 30 days.

I hope this helps answer your question. If you'd like to do a quick call to finalize any other questions you may have, I'd love to chat. Just let me know and we'll go from there.


Answered 6 years ago

This really depends on the stage you're at.

Keep in mind that I don't know your specific product or service, so I'm offering you some general advice. If you want to do a call I'd be happy to provide more tailored analysis.

Currently I run two businesses: BizeeBee (SaaS product), and Femgineer (education services). For both and in general, I never expected to make a profit off a customer in the early stages. I'm usually trying to figure out a customer's price sensitivity and price model (one-time purchase, subscription, contract, freemium, etc.).

Having said that in the beginning you can expect to make almost little to no profit off of a customer, because you're spending every penny on building awareness, capturing mindshare, and creating a high quality experience. The reason you're even asking them to pay is just to validate their "willingness to pay". I stay away from thinking of early customers are profitable once, and think more of them as my early evangelists. I want to create case studies off of them, and have them spread the word about my company.

You'll obviously want to set a budget, which it looks like you have for acquisition. But it's really hard to figure out the exact unit economics, mainly because you don't know how much it's going to go cost you yet to service them.

I say service them, because you might have attracted some customers at certain price point who are actually more demanding than you'd like, as a result your servicing costs maybe even greater than acquisition. So you'll want to track that to either avoid attracting those kinds of customers in the future, or possibly increase your price point to cover the cost of servicing customers.

Finally, the profitability of a customer depends on the type of product you have. If you have a one-time use product, then barring returns, you should be able to know the profitability pretty quickly after the sale i.e. expiration date of the return policy. If instead you are operating as an ongoing service then it's likely that it will take much much longer. If you're offering a service then you have to restate the value proposition every time someone is paying you i.e. monthly subscription or renewing a contract, and keep track of costs to servicing them during that period of time.


Answered 6 years ago

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