How Much Are You Spending To Get Each New Customer?

Did you know that 80% of your profits will come from 20% of your customers?

This is the Pareto principle, a phenomenon inspired by Italian economist Vilfredo Pareto.

In the early 1900s, Pareto noticed that 80% of land and wealth in Italy was owned by 20% of its population. He suspected that it might imply a broader rule in cause and effect—around 80% of effects coming from 20% of causes.

Later, prominent management consultant and engineer Joseph Juran found that this principle was in fact ubiquitous. He saw it appearing again and again, from science to economics to sports, and even in taxation.

Juran called it the Pareto principle, as a nod to Vilfredo Pareto’s work.

So what does this have to do with retailers and the amount we spend on marketing?

Let’s find out.

Applied to business, Juran found that 80% of profits came from a small segment of customers—around 20%.

If you think about your top 20% of customers, are they first-time shoppers? Or are they regular customers who are already in your database? Of course, they’re the latter.

Every retailer spends time and money on acquiring new customers (social media, Google Ads, ground rent). And every retailer spends time and money on turning customers into regulars (emails, SMS, loyalty programs).

But often, businesses don’t know exactly how much they spend on both, or either, and how each converts into revenue.

If you’re not sure of the ratio of time and money spent on each of these two strategies, you could be spending excess marketing dollars that could be better spent somewhere else. New stock, for example.

Attracting new customers—while important—is much more costly than bringing back an existing one. More often than not, we see that retailers are spending more time and money on finding new customers, and not enough on customer marketing.

That presents a massive opportunity… because marketing to your existing customers costs a lot less than marketing to strangers who may have never heard of your brand.

In this article, we cover:

• What is Customer Acquisition Cost and why is it important?
• What is Average Customer Lifetime Value (ACLV)?
• How do I increase ACLV?
• How do I find my ACLV?

What is Customer Acquisition Cost and why is it important?

Customer Acquisition Cost tells you how much on average you spent attracting a new customer.

Generally, it’s the total amount spent in sales and marketing (including offline campaigns and the wages of people involved) to win each new customer. For retailers with brick-and-mortar stores, that cost will sometimes include rent costs too.

It’s important because it sets a benchmark for the sales that come as a result. Simply, it can help you understand if you’re spending too much on acquisition.

How to find out how much you’re spending on each new customer:

Let’s say you’re a shoe retailer.

You launched a new campaign to promote your new arrivals for summer. It’s a 40-day blitz campaign, and here’s the simple cost breakdown:

Your digital marketing specialist put $4,000 into social media ads and boosted posts. You engaged a media agency to run some print and billboard campaigns, with creative costs included in that. It came to $15,000. You also spent a bit, say $1,000, on store layout changes and website maintenance in time for the release. The total cost of all this was $20,000.

Now, adding the wages and overhead for all the people involved in the campaign— a further $20,000. 

The total campaign cost was $40,000. Over the campaign, 1,000 first-time customers bought the new arrival stock across your bricks-and-mortar and e-commerce shops. 

Therefore, the cost to acquire each new customer was $40. Pretty simple so far.

Here’s where it’s easy to get the wrong answer from the right data.

If each of those new customers only spent $30, that would mean you lost money on the campaign overall, right? 

Yes, perhaps in the short term, you’d be correct. We’ve seen merchants write off entire campaigns because they didn’t immediately see results. Sure, in some cases, that judgment may be correct.

But it’s not the whole story.

This is where it’s important to know your Average Customer Lifetime Value. 

As well as just a one-off $30 purchase from the new arrival campaign, what if each of those new customers comes back again and again? With each customer spending on average $400 over the next three years?

The economics look much better now.

Sure, you might be spending $40 for a $30 sale, but the cost of marketing to those people again is so much cheaper. Sending an email or SMS costs barely anything compared to running an Instagram ad. Best of all, you know these people are already interested in what you sell.

What is Average Customer Lifetime Value (ACLV)?

Average Customer Lifetime Value is the value (revenue, in dollars) that each customer brings to your business over the course of their relationship with your brand (their “customer lifetime”).

How do I increase ACLV?

The greater the ACLV, the better. By marketing to your existing customers, you increase their value to your business. ACLV is an important metric and should be tracked over time. Ideally, you’ll see month-on-month growth of your ACLV as a result of your customer marketing efforts.

Here are some of the top ways to increase your customer lifetime value:

• Implement a loyalty program
• Send abandoned cart reminders and other automated communications
• Segment your database to send them more relevant marketing messages
• Run VIP offers to your best customers
• Set up tailored product recommendations

How do I find my ACLV?

The average lifetime of a retail customer is three years. So to find your ACLV, you need to know how much your average customer spends with you over that time.

There are a number of different and accepted ways to find your ACLV. You can download our free calculator, a simple workbook designed to help you find the average value of your customers.

Even easier, sign up for Lightspeed Marketing & Loyalty. We take your sales, marketing and customer data and automatically calculate your ACLV for you.

Lightspeed Marketing & Loyalty

Lightspeed Marketing & Loyalty gives you all the tools you need to increase your customer lifetime value, track marketing results, and drive revenue:

• Build a customer database
• Send email and SMS campaigns to customers
• Create set and forget marketing automations
• Set up loyalty, reward and membership programs
• Capture feedback and generate Google reviews
• Offer loyalty points in-store and online

Sign up for Lightspeed Marketing & Loyalty for free here.