If you’re an avid watcher of the hit TV show Shark Tank, then you’ll likely remember one of the top questions the entrepreneurs are asked: Do you know your customer acquisition cost? While this is an important factor when building your business, it’s actually part of a larger figure: the customer lifetime value formula.
Both of these values (and why they’re essential) are covered in more detail below.
Questions You Should Ask Yourself As An Entrepreneur
When you’re just starting a business, you have so many factors to consider! It’s all about contracts, legal paperwork, business planning, product testing, marketing strategies, and managing employees.
These are all big parts of building a reputable business that delivers quality products or services and makes ends meet month-to-month. However, there are some specific questions you should ask yourself to make sure you’re on the right track to profitability.
Take a look:
1) Who Is My Target Audience?
Creating a killer product or service is only half the battle. You also have to know who you’re selling to. You could have the greatest idea in the world, but without a clear picture of your target audience and a strategy for finding them, your business won’t be sustainable.
2) What Is My Marketing Plan?
Having a digital marketing strategy is a no-brainer in modern business today. However, it’s important that you use the platforms and lead generation services that bring your target audience to you.
Some of the most common social media and campaign platforms are:
To start, pick a few platforms from this list to really engage with your prospective customers on. For example, if you know your target audience is between the ages of 20-35, Instagram is often a great place to start. You can even see your business’s analytics under your profile to help you determine if your marketing strategies are connecting with your ideal market.
3) What Is My Customer Acquisition Cost?
Here it is, folks — the question referenced at the top of this article: What is my customer acquisition cost? Your acquisition cost is essential to nail down because it helps you figure out where your time, energy, and resources should be poured into to make a sale.
For example, if you’re spending $1,000 on direct mailers each month, but you’re not seeing any return on that investment, maybe it’s time to switch to a solely digital marketing strategy. The same goes for online ads. If they aren’t producing customers and are costing you an arm and a leg instead, it’s time to reevaluate your strategy.
How The Customer Lifetime Value Formula Can Change Your Business (For The Better)
After you have a firm grasp on who you’re marketing to, what your marketing strategy is, and what your customer acquisition cost is, it’s time to lean into another formula that will help your business stay afloat: the customer lifetime value formula.
Simply put, this formula includes the variable costs associated with each customer, such as material costs, labor, fulfillment costs, shipping, customer acquisition costs, sales commissions, and more. This value is a present figure that shows the future cash flow contribution from a single customer during his or her entire relationship with a business.
It sounds complicated, but it’s one of the most useful numbers you can have in your toolkit as you’re growing your business. Knowing what you spend on acquiring a customer and how much they will spend with you is the ultimate sustainability marker.
For more information on figuring this value, click here.