Remember the “good old days” of childhood, when starting a business meant mixing lemonade, making a sign, and hanging outside with your friends? Customer Acquisition was as easy as charming the sidewalk pedestrians, and you were done with them as soon as they bought a cup. Chances are, any profit you made was instantly spent on a coveted toy. The business was a “pop-up” for the sheer fun of it. Now that you’re all grown up, while you’re hopefully still having fun, you’re wizened to the financial item lines necessary to keep your business thriving. You’re the one buying the lemons now, and you know that the repeat customer is key. You need more than a table and a poster board sign to make sales, and more than a decent cup of lemonade to keep ‘em coming back. Customer Acquisition Cost (CAC), and its close cousin, the Customer Lifetime Value (CLV) are frequently overlooked components of running a successful business. Pour yourself a glass of something refreshing, and let’s take a quick look at how calculating your CAC and CLV is crucial for your business, and to making lemonade.
CAC is simply how much you spend to acquire a customer.
The equation for its calculation is How Much You Spend On Sales/Marketing divided by The Number Of Customers You Acquire In That Given Time Period.
CLV is the net value of that customer.
The equation for its calculation is How Much That Customer Spends During Their Entire Relationship With You minus the Costs (to you) of What They Buy.
Used together, these numbers help illuminate whether your marketing strategy is ultimately serving your business, and where you may need to change your strategies.
Determine how much you need to spend to acquire new customers, together with how you can provide better service (and drive future sales) to current customers. When you increase the lifetime value of a customer, you can afford to spend more to acquire new customers because you know those future sales will offset your marketing costs. Increasing your CLV may mean making adjustments to the way you handle customer service, your cross-sell and up-sell plans, referral incentives, and more.
Prioritizing a positive customer journey creates the opportunity for referrals. The potential CLV from referrals is unlimited, with greatly reduced CAC, since truly delighted customers will refer naturally, for “free”, and those they refer will refer, and so on and so on. With a little foresight, you can build a referral system that runs itself. The ideal sales funnel seeks to turn Strangers into Promoters. Attract, Convert, Close, Delight. In other words, attracting and acquiring your customer is only the beginning. In order to grow, you must convert, close, and delight.
So, run the numbers and ask yourself:
Can your website conversion efforts be improved? Can you make your calls-to-action more powerful? Can you improve your landing page? Can you boost the value of your current customers by providing better customer service? Is there a new product or service that could be compelling to existing customers? What can you do to encourage customers to become promoters?
With these questions as your launch point, you’ll be closer to ensuring that your lemonade stand is the best on the block, not just because your concoction is the most refreshing, but because you’ve turned your customers into promoters. Now, go buy that toy.