Working out this number seems simple enough. Bendle et al. (2016) Simply states that you divide the amount spent on acquisition efforts by the amount of customers acquired will give you the cost of each.
Why is this important?
If this number can be calculated, the financial standing, on paper, becomes simple for a business to be profitable. Ensure that this cost is less than the value a new customer will provide to the organisation and it is a simplified formula for success.
To calculate the value a new customer can provide, Bendle et al. (2016) suggests using prospect lifetime value or PLV. This does require the customer lifetime value which has been discussed in previous blogs.
PLV allows an organisation to estimate the value of customers and in some cases segment these to provide a tiered valuation which can identify primary targets etc. From here, an informed decision can be made as to focus on customer retention if the value is low and cost is high of new customer prospects.
In the case of the PLV being high, this will allow an organisation to estimate their acquisition budget to ensure their efforts remain profitable.
This becomes a key metric in marketing strategy to verify the viability of success or at least add accuracy to strategic decisions to improve the likelihood of success.
References:
Bendle, NT, PW Farris, PE Pfeifer & DJ Reibstein (2016) Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance, 3rd edition. Pearson: New Jersey
