How Much Should You Spend to Acquire a New Customer?

Understanding the magic, the profitable number you should spend on acquiring a new customer for your business, whether it be for your agency, an ecommerce brand, or a plumbing company, is no easy feat and unfortunately does take some brain power to work out. In this article, we explain how much should you spend to acquire a new customer. Below we’ve created a list of what you need to review to work out a very top line figure for your business. Now, the reason for doing this is the following:

Say you’re an online brand that sells mens clothing and your average order value per person currently sits at £25. If you start running ad campaigns and it costs more than that to acquire a new customer, you’ll likely turn it off and go back to the drawing board because you feel like you’re losing money. On paper, you are, but digging into the finer details will actually help you work out your break even and how much you should actually spend for every new customer.

How To Acquire New Customers?

Determining a cost per new customer target for Google Ads involves several steps to ensure it aligns with your business goals and financial capabilities. Here’s a step-by-step guide to help you know how much should you spend to acquire a new customer and target for your Google Ads campaigns:

Understand Your Business Goals:

– Start by clearly defining your business objectives related to customer acquisition. Are you aiming to increase sales, promote brand awareness as a new business or start getting your first sale through paid search campaigns? These examples all have different equations.

Calculate Customer Lifetime Value (CLTV):

– Now this is an important one. Determine the average revenue generated from a customer over their entire relationship with your business. Consider factors such as repeat purchases, upsells, and customer retention rates. To dig further in, you need to know how long on average customers by from you before moving on,

– Calculate the CLTV by subtracting the average cost of acquiring and serving a customer from the average revenue generated from that customer over their lifetime. The revenue generated and profitability per new customer should be two separate figures so you can further understand the profitability per new customer.

Understand Your Profit Margins:

– Evaluate the profit margins associated with your products or services. Calculate the difference between the revenue generated from a sale and the total cost of goods sold (COGS), including production, marketing, and overhead expenses. This will take you time and will allow you to get an indication of how much you have to play with to get anyone in the first place. At this point you will have a breakeven figure and then you need to work with your paid search agency or in-house team to work out how much profit you’re willing to shave off to acquire new business.

Set Realistic Conversion Rates:

– Estimate the conversion rates for your Google Ads campaigns based on historical data, industry benchmarks, and campaign performance metrics. If you had someone running it that wasn’t overly experienced then you may want to get a second opinion/take that number with a grain of salt.

– Consider factors such as ad targeting, ad copy effectiveness, landing page experience, and competition in your industry. Best case scenario here is letting the data doing the talking from running good quality campaigns.

Determine Acceptable Acquisition Costs:

– Based on your CLTV, profit margins, and conversion rates, establish a target cost per new customer that ensures profitability and sustainability for your business.

– Consider your business’s financial resources, growth objectives, and competitive landscape when setting the target acquisition cost.

Now the formula is the following:

CAC = Cost of sales + marketing spend / number of new customers acquired.

Now whilst there are other factors in there to give you a more accurate figure (like using UTM data to exclude spend from returning customers etc), this is a good starting point. It is now your job to reduce it if too high or scale the amount of new customers in.

The Customer Lifetime Value (CLTV) to Customer Acquisition Cost (CAC) Ratio measures the relationship between the lifetime value of a customer and the cost to you of acquiring that customer. The LTV:CAC ratio is calculated by dividing your LTV by CAC. This ratio here is a signal of profitability.

Conduct Test Campaigns:

– Run test campaigns on Google Ads with varying budgets, targeting options, ad creatives, and bidding strategies to assess their effectiveness in acquiring new customers.

– Monitor campaign performance metrics such as cost per click (CPC), conversion rate, cost per acquisition (CPA), and return on ad spend (ROAS) to refine your cost per new customer Target.

Optimise Campaigns:

Continuously optimise your Google Ads campaigns based on real-time data and insights to improve their efficiency and effectiveness.

Adjust targeting parameters, ad messaging, bidding strategies, and budget allocations to achieve your desired cost per new customer target while maximising ROI.

By following these steps and closely monitoring your Google Ads campaigns’ performance, you can determine a cost per new customer target that aligns with your business objectives, profitability goals, and marketing budget. Adjustments may be necessary over time as market conditions, competition, and consumer behaviour evolve.

Conclusion

When deciding how much you should spend to acquire a new customer, consider factors like customer lifetime value, profit margins, and marketing efficiency. A balanced approach ensures a sustainable CAC while maximizing your ROI. Regularly analyze and optimize your strategy to keep acquisition costs manageable and drive long-term growth.

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