As a small business or startup, it’s critically important for you to know your revenue and costs. That’s why you create business plans and projections, and then do debit and credit ledger entries in your accounting software. You do cost analysis and breakeven analysis in order to set the right pricing for your products or services. As a business owner or manager, you are also aware of gross and net profits, asset values, total overheads and expenses, debts to be paid, etc.
But do you know how much it costs you to get one new customer, and why customer retention is more important than everything else?
Importance of Knowing Your Customer Acquisition Cost
Before showing you how to calculate the cost of customer acquisition, let’s take a minute to see why it’s so important. Assume you spent Rs.20,000 to rent a stall at an industry event, where you managed to get 40 leads. Through follow-ups by your sales team, you eventually got 5 of them to sign up as customers, and pay you Rs. 1,500 each per month. Let’s say the cost of sales touches (salaries, travel expenses, calls, food, etc.) to close these 5 leads was around Rs. 10,000.
So the revenue generated from this Rs. 30,000 in marketing and sales spend is Rs. 7,500 per month. It also means the cost of getting one new customer from this event was Rs. 6,000, and you can break even in 4 months. Whatever revenue you get from these customers after that is profit.
What is Your Customer Lifetime Value?
Now this is where it gets a little tricky. The period for which you can retain customers varies widely, so you have to be the best judge of that based on your business historical records. Specifically, the answers you need are – how long does a customer stay with you, and how much do they pay in total. That is your average customer lifetime value or LTV.
With reference to the example above, if those 5 customers you signed up from the event leave you in less than 4 months, then your customer acquisition cost is more than your LTV, which means you are running the business at a loss.
So while it feels good to get 40 leads and 5 new customers from a single event, it may not actually be good for your business if you cannot retain them.
So friends, this is the level of service and business philosophy that you and I have to follow. Yomillio will treat every single member as a close friend and a part of our family. Call us whenever you want to talk. Tell us about your needs, your problems, ambitions, aspirations and anything else you want to share. As a close friend and family member, we want to help you in any way we can.