Tracking your Acquisition Cost (AC) to help calculate the ROI of your marketing
Ok, so if you read the last two articles, you now know your Customer Lifetime Value (LTV).
You also know your Allowable Acquisition Cost (AAC).
Now comes the moment of truth. Is your marketing profitable?
The only way to know whether your marketing is profitable is by calculating your Acquisition Cost (AC).
The Acquisition Cost is exactly what it sounds like—it’s the amount you actually spend to acquire each new member.
Was it lower than your Allowable Acquisition Cost? That should tell you whether your campaigns are on-budget or not.
More importantly, was it lower than your Customer Lifetime Value? If not, you have a problem.
There are a few ways you can calculate your Acquisition Cost. I’ll give you two:
- Take your entire marketing budget for any period of time (i.e. a month or year) and divide it by the number of members who joined in that period. This method is broad and imperfect, but it gives you a close enough representation.
- Take your channel-specific marketing budget (i.e. ad spend) and divide it by the known number of new members each month who came from that source (i.e. members who found you through an ad). This is more granular, but you can’t track everything this way. What’s the ROI of a good website design, for example?
Chances are you’ll do a bit of the two methods above depending on the situation and level of detail you’re tracking.
The result of those equations will tell you whether your overall marketing or channel-specific efforts are producing a positive return.
As long as the Acquisition Cost is below the Customer Lifetime Value, you’re not losing money (probably).
But ideally, your Acquisition Cost should be below your Allowable Acquisition Cost, too.
If not, you may want to ask yourself why that might be:
- Are there leaks in your marketing?
- Did you do the math right?
- Are you tracking where each new lead came from originally?
- Is your product what people want?
- Is your pricing competitive?
- Were you realistic in your AAC expectations?
There are a lot of factors, and over time you’ll know what a reasonable Acquisition Cost should be.
A key factor to all this is knowing where your prospects found you originally. Did they click an ad? Did they hear about you through a friend? Did they find you in an organic search on Google?
You’ll need to know this if you want to really sharpen your marketing.
There are methods for tracking it all, including a good CRM and having the discipline to input the lead source into it as you talk to people.
There are also tools like HubSpot which track where each converted lead comes from, so there’s no limit to your options.
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