Do you feel like your company is investing time and energy into your marketing plan, but you just can’t tell which channels are most effective? Or are you unsure of how much money you should really be devoting to your marketing efforts?

You might think it’s just your company considering these questions, but it isn’t. We see these scenarios in the brands we work for all the time. If you’re investing money and energy into your company’s marketing strategy, give yourself props for taking a great and important first step. Everyone has to start somewhere in order to find the plan that works best. To narrow your marketing to the channels that most effectively generate new sales, it’s time to take the next step into tracking your marketing data. One of the best ways to measure this is to compare your customer acquisition cost to your customer lifetime value.

Customer Acquisition Cost

Not all marketing channels will attract new customers for the same cost. Your customer acquisition cost is a measure of how much money it took for you to gain one new customer. To calculate it, find the sum of all the money you spent acquiring new customers and divide by the total number of new customers acquired during a set time period. For example, if you spent $3,000 marketing your latest promotion last month and earned ten new customers during that time, then your customer acquisition cost is $300.

It’s helpful to find the customer acquisition cost for each marketing avenue you use, so you may want to perform this calculation using the costs of each individual channel. This will give you an accurate measurement of how each of your marketing initiatives is performing and where your new customers are really coming from. Then, depending on the numbers, you can scale back to more expensive methods that aren’t producing results while you reinvest in the most effective and lowest-cost options.

It’s always helpful to know the average acquisition cost of a new customer, but it takes on much more meaning when you compare it to your customer lifetime value.

Customer Lifetime Value

If you want to determine how much money to invest in marketing, your customer lifetime value is a helpful metric to track. Put simply, customer lifetime value is how much total net profit you will earn per customer. The easiest way to calculate it is to multiply your average profit from each sale by the average number of times a customer would purchase from you over their lifetime. If it seems difficult to calculate exactly how many times the average customer purchases from you, try to estimate how many times someone might buy from you in one year, and multiply that by your average customer lifespan.

Realistically, you should consider the lifetime value in two different scenarios. One is a potential best-case scenario lifetime value, which would represent a customer’s total value if they make every repeat purchase with your brand. However, you should also consider the reality of how many of your customers’ repeat purchases will be with your brand to calculate your most practical customer lifetime value.

Now that we understand what each of these values mean and how to calculate them, let’s see how they work together. We’ll revisit our customer acquisition cost example. If you determine your customer lifetime value is just $100, then it’s not worth it to spend $300 acquiring them. However, if your customer lifetime value is $10,000, then spending $300 to earn their business is definitely worth it.

It’s important to realize that most businesses should be prepared to spend a solid chunk of change to acquire new customers, especially if their lifetime value is high. A customer worth hundreds of dollars to you will probably require quite a bit more than $5 in acquisition costs. Be realistic about the time and money you’ll need to spend in order to earn valuable new customers. You know what they always say: you have to spend money to make money. Thankfully, with marketing metrics like customer acquisition cost readily available to us, you can make sure that money is being spent as effectively as possible.