How Much Should You Spend To Acquire A New Client?

Answer this question for me:

Would you spend $2,000 to acquire a new client?

Most business owners would answer that in one of three ways:

• Go with a gut feeling
• Look at what everyone else is doing
• Completely guess

But that’s not how I’d answer it…and neither would the most successful people in your industry. We’d look to something else entirely.

Numbers.

As a business owner, knowing your numbers is the most important thing you can do.

Knowing your numbers allows you to operate like an engineer — to make informed decisions and smart adjustments based on what the data tells you.

If you don’t understand your numbers, you’re living in what’s called “hope marketing”. Without tangible data, you’re just guessing. And none of us want to guess when it comes to our income.

But…

Even the most well-intentioned number crunchers can fall victim to a huge mistake when analysing the data…costing them revenue, clients, and in some cases, even their businesses.

And it’s all because of one metric that’s severely misunderstood.

The misunderstood money metric

If you asked me whether you should spend $2K to acquire a new client, I’d first need to explore the Lifetime Value of a new client.

Lifetime Value (or LTV) is, as the name suggests, how much revenue you generate over a client’s entire lifecycle.

LTV = Average Transaction Value (how much you make per sale) x Average Frequency (how many times the average client purchases from you)

Let’s say that you’re a real estate agent. You make an average of $10K commission per sale and the average client works with you 3 times over their lifetime.

The LTV of a new client would be $10K x 3, or $30K.

Knowing a client’s LTV is so helpful as a business owner. It helps you decide how much you can afford to spend to acquire a new client (through advertising and marketing).

So back to my original question…

If you’ll make $30K from every new client…is it worth it to spend $2K to acquire them?

Well…it depends.

All surface-level signs point to “yes”. Depending on which expert you follow, you might hear that you should devote 10%, 20%, or even 50% of a customer’s LTV to acquire them.

But this is bad advice. How much you should spend to acquire a new customer depends on your profit margins — how much you actually make after taking into account your business expenses.

20% is great for some, while others may be able to spend 50% on customer acquisition and still turn a nice profit. It’s different for everyone! Which is why there is no “right” number to aim for.

Plus, the experts are still ignoring one big piece of the puzzle…

The crucial factor that LTV doesn’t consider

In addition to LTV, it’s important that you also consider time — whether you can sustain the upfront advertising expense in the long term.

Remember, LTV is LIFETIME value. You won’t make it right away. It could take decades to generate the full value.

…And your business could go bankrupt in the meantime.

Here’s an example to illustrate this point:

Let’s say you’re a software company and your customers pay $100/month for your service. The average client stays with you for 25 years (because your software is clearly awesome!) That client’s LTV is $30K, just like the first example.

If you spent $2K to acquire a new client, you wouldn’t make back your initial investment for one year and 8 months! At $100 per month, you wouldn’t start generating a profit from that expense until month 21.

Now, some businesses can sustain that type of loss for years. Amazon and Rupert Murdoch were wildly negative for the first few years in their business ventures. That type of loss might be feasible for big, billion-dollar businesses…but not so much for us.

In my work with small to medium sized businesses, I’ve found that most of them can’t sustain losses like that. They would go bankrupt if they didn’t make a profit from a new client until Year 2.

That’s why timing is so important to consider. There’s no point looking at a lifetime value of 25 years, if you’ll have to close your doors after one year of losses.

The REAL question you should be asking to make smart money decisions

Instead of using LTV to guide your advertising budgets, here’s the trick that works wonderfully for my private clients:

How much you will make from a new client…in the first six months?

Assuming you can’t sustain a long-term loss — because most small businesses can’t — let’s make your goal to recoup your initial investment within the first six months.

If you’re someone who makes a big upfront profit (like the real estate agent who makes $10K/sale,) you can recoup your costs quickly. Go for it and invest $2K in Facebook ads to get that new client!

But if you have smaller, more frequent transactions (like the software company who will only make $600 in six months) you would want to set a smaller budget to acquire a new customer. Alternatively, you could work to increase sales upfront by offering relevant upsells, cross-sells, or add-ons to make more revenue per customer. (But that’s a topic in and of itself…)

I wish I could give you a set percentage when it comes to setting your budget to acquire a new client. But there is no right answer! It entirely depends on your unique business.

At the end of the day, it’s about profit and time. Those are key factors in the art and science of growing your business.

The only rule of thumb I stick to is: if you can turn a profit in the right amount of time, then you’re on your way! 

How to advertise with the utmost confidence

Once you have run ads long enough, you’ll learn your ad statistics and your conversion rates (the % of leads you convert to clients with your follow-up and sales process.)

That’s when we ultimately come to the magic number which is EPL: how much you earn per lead. Knowing your EPL helps you make accurate profit forecasts as you grow and scale your marketing.

Let’s say you know it takes you 50 new leads to secure one paying client. And that each client has a LTV of $30K.

$30K / 50 leads = $600 revenue per lead (your EPL – earnings per lead for lifetime value)

Your short term value of a new client, in this scenario, is one sale with a commission of $10,000.

(Remember, we have to calculate how much you make in the short term to stay in business in be profitable to keep going)

If it takes 50 leads to make one sale, it’s $10,000 divided by 50 leads, which is = $200 earning per lead (EPL)

So let’s say, it costs you $30 per lead when advertising on Facebook.

That would mean 50 leads would cost $1,500 (50 leads to get one customer x $30 per lead = $1,500) returning one customer worth $10,000.

This means for $1 spend on ads you are returning over $6 back into your business. (10,000 divided by 1,500 = $6.67)

Start to get clear on this? Starting to see how exciting knowing your numbers is?

How confident would you be investing in Facebook ads if you knew every $1 spent return $6+ back to you 

When you know how much a LEAD is worth to you…

You know how much you can spend to acquire new leads.

When you know how much you can spend… You CAN SCALE.

Now, let’s calculate EPL to scale your business!

To make an extra $50K, you would need 250 new leads. For an extra $250K, you’d need 1,250 new leads.

Your EPL gives you the ability to scale and advertise with confidence, knowing how many leads you’ll need to meet your profit goals.

To help you build a profitable Facebook ads campaign, I need to understand your numbers as much as you do! That’s why I include financial analyses like this in my private client work.

Together, we go through everything from your offerings to your timeline to your profit margins, to ensure your ad campaign will be profitable for you.

Want to learn more about how we can grow your business (and profits) together? Click here to learn more about private client services.