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How much can I spend to get a new client

How much should you spend to get a new client?

How much can I spend to get a new client
Learn how much you can spend to get a new client and still be profitable.

We all know that advertising is a critical part of attracting new leads. After all, new clients are the lifeblood of any business, and without advertising, it’s almost impossible to create a consistent reliable flow of leads that convert into new sales.

 

And thanks to Roman playwright Titus Maccius Plautus, we all know we have to spend money to make money, but exactly when should we stop and when does it stop being profitable?  Let’s take a look!

 

Do I really need to advertise?

Good question. Yes, yes you do. Because advertising puts you in control of your business growth. Now, it’s true that leads from advertising are not as good as leads from referrals. But the problem with referred leads is you can’t control when you get them, how many you get and what kind of leads they are. Some referrals are great, just the kind of leads you’re after. Others, well, not so much, but you feel obligated to say yes to them because a friend, relative, colleague or client did such a great job talking you up.

When you advertise, you can increase and decrease the number of leads you get by increasing or decreasing your ad spend. You can filter out the leads you don’t want to work with and you can turn your lead generation on and off to suit what’s going on in your business.  This is where genuine growth and scalability come from.

 

How much is a customer worth?

Before you can decide how much you can spend on ads, you need to know how much a client is worth to your business.  We’ve done this exercise with probably hundreds of businesses and they’re usually blown away at the result.

 

Recently we went through this with Amy, a hairdresser. We were helping create an offer to headline her ad campaign and Amy was worried the offer was too big and she wouldn’t make any money. The offer we suggested was a cut, colour and treatment for a nominal amount of $29 (this is sometimes called a tripwire offer). This was well below her cost so Amy was reluctant, which is when we did this exercise.

According to Amy, her customers come in about once a month and spend, on average $120. A typical client will come in and spend around $200 – $250 for a cut, colour and treatment, and maybe some product then comes back about a month later for retouch and spend $50 or $60. So we decided to be conservative and work on an average spend of $120 a month.

“Amy told us her clients were more likely to leave their husbands than their hairdressers (sad but true)”

Next, we looked at how long her clients stay with her. Amy told us her clients were more likely to leave their husbands than their hairdressers (sad but true)  and she’d had some of her clients since she finished her apprenticeship over 13 years ago. So we went with an average of 5 years. Obviously, you’re not going to vibe with everyone and some people will come and go more quickly.

So, using the formula below, an average client for Amy is worth over $7000.

On that basis, her $29 offer seems like a very small price to pay to get a new customer.

How much are you spending to get a new customer?

Once you know how much a new client is worth, and you’ve decided how much you’re willing to spend to get each client, you need to know how to measure the cost. This is known as the Cost Per Acquisition, or CPA.

The first, and easiest part of the equation, is to measure your advertising spend. It’s a good idea to separate the spend from each platform so you can measure which one is getting you the best results.

Next, is to include any other direct marketing costs, such as any spend on SMS and email marketing. Finally, include the hard cost of any offers you’re making. For example, if you have a gift with purchase offer, or you’re losing money on the offer as you might with a tripwire offer.

Once you’ve added these costs for the month, you need to divide them by the number of conversions for that month. That gives you the Cost Per Acquisition or CPA.

If you tag your leads as they come in so you can identify where they came from, you’ll be able to see how many of those conversions came from each channel, and drill down even further to see which channel is the most profitable. Most CRMs, especially those with email and SMS marketing built-in, will have a simple tagging function.

 

So how much should you be spending to get each new client?

There really isn’t a hard and fast rule on this, it depends on so many variables. Look at how much you give out in refunds, your cost of goods (or services) sold and your overheads. Include everything like wages, subscriptions, insurance… everything. Calculate this as a percentage of sales.  It can be easier to do this over a fixed period of time, say 1 year. Don’t forget to adjust your Lifetime Customer Value to 1 year as well. Let’s call that our 12-month value, or 12MCV

Now, do this calculation.

customer value calculation

Let’s say we sell a $500/month service, we get about a 5% refund rate with 10% cost of goods sold and 40% overhead.

12MCV $6000

Refunds $300

COGS $600

Overheads $2400

That leaves us with a Nett Customer Value of $2700.

So, technically, we could spend $2700 to get a client, but then we’d make zero profit. So next we need to figure out what profit margin we want.

Let’s say we want 30% profit. That’s $1800 if we multiply our 12M value x 30%

If we deduct $1800 from our Nett value, we get $900.

So we can spend $900 to get each client and still cover all our costs and make the profit we want.

 

Some of this is based on estimates so if you’re not working down to the exact dollar, that’s OK, it’s really just an exercise to get you thinking about what you can spend to get a new client. Often it will be more than you think.

Want to grow your leads and sales in the next 90 days? Reach out for a chat with us today.