The general rule of thumb is that recruiting a new customer takes five times as long as maintaining an existing one. But is it better practice for your business to focus more on bringing in new customers or keeping the ones you already have pleased? Which will bring more success and fortune? The answer lies somewhere in the middle. Acquiring new customers is just as crucial to a business as retaining the old ones. While new customers often bring in more revenue for the short term, those steady, returning customers end up bringing value to your business in the long run.

That is where the term Customer Acquisition Cost (CAC) comes into place. To determine the cost it takes you to acquire a new customer:

         1. Add up all your sales for any given period.
         2. Include everything from marketing costs to how much you paid your employee, all the overhead.
         3. Divide it by the number of customers that were acquired in that period.

Next, you will want to compute the Lifetime Value of a Customer (LTV). Look at the average purchase costs and frequency of a customer’s purchases and multiply that by the average number of years they stay with you.

Now you can compare your LTV to your CAC. This will give you an estimate of how long it takes to recoup after acquiring a customer. The higher your LTV is to your CAC, the better. If your LTV to CAC ratio isn’t 3:1 or higher, it’s more than likely your business will end up suffering if it isn’t already.

To correct this, start small and work your way up and outwards. Two great places to start are:

1. Reassess your marketing channels

To determine how well the various marketing channels you use are actually doing, you will want to assess how profitable the multiple channels have been. Examples of marketing channels include social media ads, content and email marketing, SEO, and word of mouth, to name a few. As you review the data from each of these channels, make note of the ones that don’t seem to be adding any value to your overall numbers. You’re only wasting money investing in them if they aren’t drawing in new customers or generating enough sales. Drop those channels, turn around, and invest that money into a place that serves you better.

Tip- Emails are not only easy and a free option to choose, but are one of the most effective ways to reach customers and are one of the most common marketing channels used today. Sending regular emails will keep your company fresh in the minds of your customers, prompting a better likelihood of them making a purchase sooner.

2. Consider cutting back
You should also consider how you can lower the costs of your goods. Your business may benefit by cutting back or streamlining production processes, assuming it doesn’t affect the quality of your product. Can you negotiate lower shipping costs, find cheaper suppliers? Get creative.

However you decide to go about it, the bottom line is your business will not last if your costs are far greater than your revenue. So don’t waste possible profits in places where it doesn’t serve you.



Article by
Ava Collins
Content Writer and Researcher

Student award winner Ava Collins