Do you know how much a new client is worth to you? When meeting with prospective clients, one of the first questions I ask is “How much would you pay for a new client?” And it is a question a lot of businesses have a challenge answering.
Why is it important to know how much you are willing to pay to acquire new clients? This determines which types of marketing campaigns may work for you.
Calculating the Value of a New Client
To understand how much you are willing to pay for a new client, it is valuable to calculate the value of a client:
If they are a one-time client, it is pretty easy to calculate. However, for a business like an IT services firm, you need to look at your average monthly cost times the average length of time a client stays. If the average contract is $500 per month and most clients stay at least two years, you could calculate the value as follows:
24 months of service X $500 per month = client value of $12,000
Of course, that is the total value of the sale and does not include the cost of paying technicians, equipment, etc. However, it is a good starting point. In this situation, an IT services firm may be willing to pay up to $1,000 per new client even though it would take more than two months to recoup costs, because of expenses.
Not All Customers Are Created Equal
It also makes sense to segment your clients if there is a big difference between your average price tag. For example, a university earns a lot more from someone completing their MBA compared to someone just taking a certificate program.
Once you know how much you are willing to pay for a new client, you can apply it to your marketing efforts. For example, if you are willing to pay $200 to acquire a new client and it costs $250 to acquire them using Facebook advertising, then that is not a good advertising campaign for you. If it only costs you $100, then you know it is a good fit.
Having this understanding allows you to consider new marketing efforts or can help you to decide to cut ones that are not profitable. Either way, being able to put a value on new clients will help you to get clearer about what types of marketing makes the most sense for your business and your bottom line.