One of the most complex decisions any business must make is understanding how much to pay to acquire new customers. A lot can depend on whether your business is more transactional, like a retailer, or you sell a recurring product or service, like Netflix, that charges you a monthly fee.
The general rule of thumb is that you can spend more, as a percentage of your selling price, to acquire a recurring revenue customer than someone who is one-time. But how much should you spend? And more importantly, when is it appropriate to involve your sales and marketing team? Or maybe even try to find a way to spread the word about your product or service virally?
What’s your Number?
When it comes to how much to spend and who to involve to acquire new customers, your starting point is how much you charge for your product or service.
My guideline is that you can spend more on a recurring product or service, perhaps 40 percent of your selling price, than on a one-time one, where you should aim for 20 percent of the selling price. You can get similar calculations if you want to set your cost baseline as a percentage of margins.
Let’s look at some examples of customer acquisition costs.
Let’s start with something big: a product or service that costs $100,000. This is a significant investment on the part of a customer, and your cost to convince them that you have what they need should reflect that. Based on our guidelines, you should be prepared to spend up to $20,000 to acquire this client. To do that, it’s more than just giving them information – you’ll need the ability to build a relationship with the customer. They need to trust you, and you can’t do that through e-commerce. Sure, some people can spend that buying a Tesla online, but can your company do that? Otherwise, this investment should tell you that you can afford to hire a salesperson to build the kind of relationships he needs, plus spend on the marketing campaigns necessary to build awareness and leads with the right customers.
Now let’s lower the price of your product or service to $1,000. That means you can spend up to $200 to acquire a new customer. You may be able to rely on a call center to help you close deals in this range, but more than likely you’ll need to rely heavily on a digital marketing campaign to do the dual work of generating leads and closing sales for you. who can do a decent business. margin. That means you have to lean heavily on strategies like Facebook ads, TikTok videos, and finding influencers to help drive people to your website. The point is that you have to rely heavily on marketing, rather than salespeople, to close these types of sales.
If you have a product or service that retails for $10, then to be honest, you don’t have to spend any money on marketing or sales. Our model says that you can spend as little as $2 to get a new customer. So how can you do that? One great strategy is to take advantage of what’s known as viral marketing, where you use content you or others create to build traction with free and earned media. In other words, you want to find ways to make your content go viral. If you can find ways to get stories about your product or service to thousands of potential customers (or more) for less than $2 each, then you have a chance to succeed.
Choose an approach that is best for you
So when it comes to deciding how much to spend on acquiring new customers, think about your selling price and how much it gives you to work with. That will go a long way in helping you understand which channel might work best financially for you: sales, marketing, or viral.
Opinions expressed here by Inc.com columnists are their own, not those of Inc.com.