Determining The Right Customer Cost per Acquisition For Your Business

Trying to figure out your paid search budget? Clearly defining your acceptable cost per acquisition for new customers is the best place to start.

All things being equal, the more your company is willing to invest to acquire new customers, the faster the customer base will grow.  However, there is also a direct relationship with your desired number of new customers and the amount you need to invest to obtain them. Deciding how much to invest in acquiring each new customer depends on the value of your customers over time, as well as your overall business goals. 

Let’s Start with Annual Value

There is a lot of talk about the “Lifetime Value of a Customer”.  Understanding the lifetime value is important, but most businesses don’t have the luxury of waiting a lifetime to get a return on investment. Thinking more in the short term, let’s understand the annual value of a customer.  Take a home cleaning business as an example. The annual value of a new home cleaning customer can be figured out like so:

Average Transaction Amount: $100
Average Transactions per Year: 26
Gross Revenue per Year: $2,600
Average Profit Margin: 50%
Annual Gross Profit Margin: $1,300

In addition to the value of one customer, you should also consider how much of your new business comes from customer referrals.  If 50% of all new business is the result of customer referrals, for example, you can assume that every new customer generates another customer. 

Once you’ve done the preliminary math, then you can wisely determine how much of that annual gross profit margin you are willing to invest. Continue Reading…