How to Work Out How Much You Can Afford To Spend On Your Marketing
Before you start any sort of advertising campaign you need to know one figure, how much you can afford to spend to acquire a customer.
You may be thinking why is this the first step, but before we start anything we must have a target figure in place to measure our results. Our aim is to get our CPA (cost per acquisition) lower than maximum cost to acquire a customer, so we can make profit from our marketing. If you don't know this figure, you may be spending too much to acquire a customer, thus losing money to do business with them.
Another reason this figure is essential to know, is for the next step in the ad creation process, our offer. If we know the maximum cost we can spend to acquire a customer we can create the offer with this figure in mind. For example you may find that it is possible to lose money on the first transaction, but because the lifetime spend of a customer is high, you will easily make it back in the long run.
How to work out the maximum cost to acquire a customer
To work this out, firstly we need to work out how much a customer spends in a lifetime on average, and then take away the cost of essential expenses.
If there is only one transaction per customer over their lifetime, then it can be easy to find out how much they spend over a lifetime, but for other like businesses like physio's, hairdressers, restaurants and cafes, where people can keep coming back to do business with you, but sometimes sporadically, it can be a little tougher to determine, but I always recommend leaning on the lower side estimate.
For businesses on subscription type payment models like gyms, cleaning or coaching you would need to calculate the average time period a customer stays with you, by the amount you charge.
If you can't get specific figures by going through your financial records, then be conservative with your estimates. It's better to be aiming for a lower figure than over estimating, which may cause you to lose money.
Once you come to this figure, then estimate roughly your expenses for the service, or if you are selling a product the cost of the product.
For example if you are selling a $100 product that somebody will only purchase once in their lifetime and it costs you $40 to buy wholesale or manufacture, then your target to acquire a customer is $60. You may also choose to add an estimate of general expenses which may be an extra $10, so the maximum you could afford to spend is $50.
Now as you still want to make profit to pay yourself you may want to set your maximum cost per customer acquisition to $25 per sale, so you are making at least $25 profit. Of course these marketing costs to acquire a customer need to be realistic as well. You may want to pay yourself $45 per sale but $5 to acquire a customer may not be a realistic figure.
For businesses starting out and trying to build, you may find you need to spend the whole $50 to acquire a customer, because you don't have trust yet in the marketplace. But this cost usually drops as your business starts to gain trust and word of mouth sales will begin.