If we’ve said it once, we’ve said it a thousand times – it costs five times more to acquire a new customer than it does to retain an existing one.

Of course, we all have to start somewhere. But this sobering stat is a key reason why we need to measure the value of our customers and our marketing efforts. So, how do we calculate cost per acquisition, and what effects does this have on our strategy?

Calculating cost per acquisition (CPA)

How we measure value depends on many factors, including marketing spend and the nature of our product. For example, it could be that we sell a high-value lifetime product, like an antique, or we could continue to target the same customers time and again.

Measuring by volume

The simplest way of calculating CPA is to measure how many new customers we acquired. Assuming we sell a high volume of lifetime products, we can easily calculate an ROI. For example: 

1.       Spend £5,000 on an antique tradeshow

2.       Acquire 100 new leads

3.       Convert 40 at £500 each

4.       Generate £20,000.

It’s cost £125 to acquire each customer, and our return is £375 each, or £15,000 in total.

Measuring by lifetime value

Of course, it’s not always this easy. Most businesses will want repeat custom or to cross/upsell. Increased retention reduces acquisition costs. Therefore, we can use data to assign a “lifetime value” to a customer. If a B2B customer orders 100 reams of paper per month at £3.50 each, we can extrapolate that they’ll order for five years. That’s 60 orders in total, giving that customer a lifetime value of £21,000.

We can then measure how much it cost to acquire that individual customer using the same calculation as above, and determine their CPA. The ROI will be much higher for lifetime customers and will reduce marketing spend in the long term.

Opportunity cost

When funds or time are limited, we need to consider opportunity cost. We can use historical data, for example, comparing ROI from a tradeshow versus a digital campaign. We need to assess whether the number of acquisitions from tradeshows outweighs the missed opportunities from a digital campaign, or vice versa.

If no data is available, we can use secondary data – looking at competitor/market statistics and case studies to value marketing methods.

What can CPA affect?

Once we understand the value of our customers, we can determine:

·       Pricing: Should we offer subscription/bulk discounts, or introductory pricing?

·       Product: Should we focus on one high-value product or diversify to attract a bigger range of customers?

·       Place: Which channels should we use to promote our product? What will cost us most in terms of money, resources, and time?

The key is to evaluate your performance periodically. Markets change, trends shift and competitors emerge. Using our existing data, we can pivot our marketing methods and reduce our CPA to power growth.

For more tips on increasing ROI, contact The Growth Guys.