When it comes to marketing, crunching the numbers counts. As a small business owner, it’s critical that you see marketing not as an expense but as an investment.
But how do you make that mindset shift?
By understanding how much a lead and a sale costs your business and what the return from that investment is.
The goal of marketing is to increase your sales in a cost-effective way.
The best way to run a cost-effective marketing campaign is to have a marketing planning process in place. Rather than a series of unplanned sporadic tactical events, a paid Facebook post here and AdWords campaign there – what I call the ‘spray and pray,’ which has no business goal, you need to understand the marketing planning process in more depth read here.
The Real Value of Marketing
Marketing matters. It is the backbone to sustainable business growth, but to ensure your marketing is an investment and not a cost, you need to place a value against everything you do, and a way to measure and report that value against the allocation of spend.
There are three areas that you should start to get to grips with in order to understand the real value of your marketing:-
• Cost per acquisition
• Customer lifetime value
• Cost per lead
Cost Per Lead
A lead is a potential customer who has expressed genuine interest in your product or service. A lead does not represent a purchase, just a response to your campaign. A cost per lead calculation can be a helpful way of working out how effective a new marketing campaign has been in targeting new customers.
To calculate CPL (Cost Per Lead) simply divide the total cost of the marketing effort by number of leads. So, if you spend $1000 on a Facebook advertising campaign and you have 30 people message or email you in response to this campaign, that would be a CPL of $33.3.
Cost Per Acquisition
Many small businesses prefer just to focus on the cost per acquisition (CAC) metric. The cost per acquisition can be calculated by dividing your marketing expense by the number of customers acquired during the period the money was spent.
Below is a list of activities you might undertake as part of a marketing campaign to increase customers:
Facebook advertising – $500
Google AdWords – $2k
Shopping Centre event – 1k
Facebook/Instagram group advertising – $500
Website optimization (3-month SEO campaign for targeted keywords) – $2k
Video content – $500
Marketing coaching $1500
Total cost = $8K
Number of new clients secure = 10
Cost per acquisition $800 (8k divided by 10)
Customer Lifetime Value
At Marketing Sense, we work with our clients to create meaningful marketing strategies that deliver profitable and sustainable business growth, so the customer lifetime value metric is a really important one as it helps you to focus on attracting the right client and retaining them.
Customer Lifetime Value (CLV) is the prediction of the profit gained during the entire relationship with a customer. This data can help you attract the right customers and retain them.
To calculate your CLV, there are several steps:
1. Calculate your average purchase value over a particular period of time, let’s say – one year. To do this, divide your total revenue for the year by the number of purchases over that year.
2. Then, determine your average purchase frequency rate by dividing the number of orders over a year period by the number of unique customers over that year.
3. From this, you can determine your customer value. So, if your average customer purchases 10 items over the year, each averaging a value of $10 – your customer value over a year is $100.
4. Finally, take your customer value and multiply it by your expected customer lifetime. If your customer stays with you for 25 years then to the CLV is $2500
Your CLV will vary depending on your business and target market. For example, a children’s clothing company will only have a customer lifetime value of 5-10 years, whereas a toothpaste company may have a customer lifetime of 40+ years.
The magic metric
To work out how effective your marketing strategies really are, try creating a ratio of CAC vs CLV. To do this, simply calculate your CLV and CAC and place them side by side.
So in the case of the above that would be : $2500 (CLV) divided by $800 (CAC)
This is a 3:1 CLV:CAC ratio
Ideally you should be aiming for a ratio of 3:1. The value of a customer should be three times more than the cost of acquiring them.
Customer acquisition cost and customer lifetime value are two extremely important metrics which help you to understand:
• What does a customer cost?
• What is a customer worth?
• What is the true value of a customer?
All clients are not equal and some are worth more of your time and investment in acquiring than others. Hopefully, by developing a marketing planning process which includes monitoring, adjusting and adapting your marketing tactics whilst keeping an eye on these key metrics you will be able to manage your Customer Acquisition Cost by spending efficiently to test and eliminate channels and double-down on making the most effective marketing channels work harder for you.
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