How to come up with an Allowable Acquisition Cost (AAC)
Yesterday, we talked about Customer Lifetime Value and why it’s important. Today, we’ll talk about how much you should allocate to acquire each new member.
Knowing this number will make it a lot easier for your marketing team to do their job. You get to give them a goal to measure against.
Ready? Let’s dive in.
The key points
As we covered, your Customer Lifetime Value (CLV) is the maximum amount you can spend to acquire one new member (without losing money).
How much you are willing to spend to acquire each new member is your Allowable Acquisition Cost (AAC).
As long as it’s less than your CLV, you’re profitable.
Naturally, you want it to be as low as possible, but you need to also be realistic. A good benchmark to follow could be one or two months of revenue for that member, but it really depends on your situation.
Let’s say your Customer Lifetime Value is $5,000. You might be willing to spend up to $1,000 for each new member (with $4,000 profit left over).
That means $1,000 is your Allowable Acquisition cost. If you spend $5,000 on advertising, you’ll want to see at least 5 new members as a result.
Now, give your AAC to your marketing team so they have a goalpost to measure against.
You won’t always see a return on your investment in the first month. It takes time to fine-tune your ad campaigns, even if you have a conversion-centric website.
Be patient. There are no shortcuts (except hiring me, perhaps!).
Tomorrow we’ll talk about how to track your return on investment.