According to Jeff Haden, BNET Contributor, thinking like this is a mistake. Jeff says, “you should almost always spend more to acquire new customers than you think, especially if you can land the right customers.”
Like any other business investment, you should think of customer acquisition costs as a true investment in your business, not just a cost that drains your bank account. Customer acquisition costs are an investment intended to “generate a reasonable shot-term return and a significant long-term return” states Haden. This is not something that you tweak every month just to make your overall expense budget “work.”
Haden uses himself and his photography business as an example on a new approach to looking at your marketing budget and why you need to spend more to acquire new customers than you actually think.
“We’ll use me as an example. I’m a ghostwriter and I also photograph weddings. (If you’re curious why I do both, this is why.) To keep things simple, assume we spend $5,000 a year on sales, we book 20 weddings a year, and the average price of a wedding package is $4,000. Quick math:
Sales cost per transaction: $250
Sales cost as a % of sales: 6.25%
Are we happy with those results? Let’s start by calculating whether we generate a reasonable short-term return on our sales investment; the definition of “reasonable” is the minimum we’re willing to make. We add all our fixed and variable costs (including cost of sales) and spread them across the 20 weddings. Say we want, at minimum, to net 20% on each wedding; if we do, we’re content — and shouldn’t spend more on sales, right?”
Wrong, states Haden. Don’t limit your thinking to only the first sale amount that you make from a customer. Instead, think of the big picture. In Haden’s case, in addition to the typical wedding package, they often get far more sales from that one customer than the initial transaction. For example, Haden states the following as additional revenue they most likely make from each wedding package they sell.
- On average, couples spend an extra $500 per wedding (more albums, extra photographer time, additional photos, etc…).
- Family and friends typically order photos and albums generating an additional $600 per wedding on average.
- Couples often contact them years later for family portraits, sessions with children, etc…
- About 70% of their bookings come from referrals from past clients.
And how much does Haden spend on those additional sales – zero. He’s already spent the money to acquire the customer so those additional sales and referrals are, in effect, free. And if you add in just the post-wedding sales ($500 from couples and $600 from families) bumping the average wedding package sale price to $5,100 their cost of sale reduces to 4.9% from 6.25% and increases their overall profit margin.
Continuing to look at the big picture, “each booking is the gift that keeps on giving, since over half the [they] get new bookings through referrals, which further reduces [their] selling costs.”
After all these factors are taken into account, particular the additional revenue that comes in after the initial sale, what does Haden spend to acquire new customers?
Almost nothing. A bit of website expense and some labor when potential client call to inquire. Why? Because he spent a lot in the early years to land clients and because he spent more and targeted a reasonable profit level per wedding because of the following factors:
- He knew upon doing a great job, clients would purchase additional photos and albums.
- That after doing a great job clients would contact him in the future for more jobs.
- And if he continued to provide great service, his clients would refer him to others.
Haden’s logic applies to your business. “Very few customer relationships, regardless of the industry, are one-off, unrepeatable events.” Let’s say you own a restaurant: if a new customer returns at least two times, shouldn’t you be willing to spend more to acquire th
at customer since you’ll spread their acquisition cost over three or more visits?
So, how do you determine what you should spend?
First, determine the reasonable short-term return you are willing to accept. Depending upon your preferences, reasonable can be as low as your break-even point – that is as long as the likelihood for future business is high so your high initial costs are offset by future revenues.
Once you have established the reasonable short-term investment, focus on ways you can expand your products and services. And, most importantly, consistently deliver great service. Combining both of these allows you to further leverage the value of an acquired customer.
Haden sums up his article with this very compelling and incredibly important thought, “above all, don’t see customer acquisition costs as simply a cost or line item. Analyze the big picture and view the cost of sales as an investment.”
Basically, “if spending more returns more…what are you waiting for?”
What are your thoughts and policies when it comes to determining your budget for customer acquisition?
To learn more, read Jeff Haden's post "How Much Should You Spend to Acquire a New Customer."
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