It sounds a weird concept but bear with me as it’s one of the most important concepts in getting your marketing working effectively. Yet surprisingly few businesses, even marketing businesses, really understand its importance!
The easiest way to demonstrate this concept is with a hypothetical example. Let’s say that your average sale is £30.00 and the cost of fulfilling each order, whether it is product cost, time or other overheads is £20.00. This leaves you £10.00 profit on each purchase.
If it costs £10.00 in marketing to make a sale to a new customer, this will mean you don’t make a profit on the sale. Making no profit on a new sale is not usually seen as a good idea and that’s where 95% of businesses stop. Marketing is then seen as an expense that creates no value.
However the 5% of really successful businesses see beyond the single sale and look at how much a new customer is worth to their business. Not just on the first sale but the Lifetime Value of the customer.
So to continue our example above, if a typical customer spends £30.00, with £10.00 net profit on each sale; but if on average each customer buys from you 4 times a year, remaining a customer for three years the Lifetime Value of a customer is £120.00.
When you realise that each new customer is worth £120.00 to your business, not just £10.00, then investing in marketing suddenly looks very different. Spending £10.00, £20.00 or even £50.00 to get a new customer now makes very good business sense.
To put it another way, would you give someone £50.00 if they promised to give you back £120.00?
The amount you need to pay to get a new customer is known as the Cost of Acquisition.
Understanding the concepts of Lifetime Value and Cost of Acquisition also the balance between them is essential for effective marketing, especially today when you can accurately track the cost of acquiring customers online and track what they spend in any given period.
If you don’t know these two key numbers in your business, I highly recommend taking the time to discover them. You may never look at your marketing in the same way again.