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How to know if your advertising represents good value for money:
Calculate your average Customer Life Time Value (CLTV)...
...and work out what you should be paying for customer acquisition
When you know what a new customer is truly worth to your business, you then have an idea of what you should be investing to acquire one.
As a general rule you should invest around 10% of your average CLTV to acquire a new customer
This means that if your average Customer Life Time Value is $500 then you can pay up to an average of $50 in advertising costs to get a new customer.
Therefore - under this scenario - if you spend $100 in advertising, you should expect to get two new customers - otherwise you'd have to question the value of the advertising.
Work out your average Customer Life Time Value (CLTV) below:
How does this work?
The calculation takes into account that in many businesses some customers are one-off purchasers, while others go on to make multiple purchases over a length of time. On top of this, some customers encourage their friends to become customers. These clients clearly have more value.
The calculation takes all of this into account and comes up with a figure that gives you an insight into the contribution that an average customer makes to your business.
The Customer Life Time Value calculation asks you to estimate what proportion of your business is one-off and what is repeat, and how many years this pattern will typically repeat itself. It also asks what percentage of customers refer word of mouth business to you.
So we are able to come up with an average figure that your average customer contributes to your business profitability, we also ask you to estimate your average gross profit percentage.
The combination of these factors contribute to a figure - your average Customer Life Time Value (CLTV) - which represents the average amount of profit that a new customers is likely to contribute to your business over the time they remain a customer.
A good rule of thumb is that you should be willing to invest 10% of your average Customer Life Time Value to gain a new customer.
This figure shows you what is reasonable amount to be spending on advertising to acquire a new customer.
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