A metric that high level business owners track fanatically is Cost per Customer Acquisition (CPA). In other words, on average, what does it cost to acquire a new customer or client for your business?
99% of business owners don’t know the answer to this question, and that’s fine.
For the 1% of business owners who are serious about taking their businesses to the next level, calculating their CPA is a foundational step.
Why is that?
Once you calculate your CPA, you can develop a new customer acquisition program, or marketing program, to attract more of your ideal clients and effectively grow your business.
For some businesses, it’s nothing more than a numbers game.
So how do you begin to calculate CPA?
The first step is to calculate exactly what a new customer or client is worth to your business.
Most builders and contractors provide a one-time service to their clients, so calculating your average client value is simple – just average the net profit of each project to come up with your number. For example, if your average project brings in $100,000 in revenue and your net profit is 15%, your average net profit is $15,000. At the risk of sounding crude, each new client is worth $15,000, on average, to your business.
For businesses that provide a repeat product or service to their clients, such as landscape or building maintenance, there are a couple additional steps:
- Calculate the average per-project net profit
- Multiply that by the number of times you will repeat that product or service for the client
- Factor in the time value of money (if you want to get sophisticated)
For example, if you provide building maintenance on a monthly basis to apartment buildings and your average contract length is 2 years, you will repeat your service 24 times during the length of that contract. If you charge $2,500/month and your net profit is 25%, your monthly profit is $625. Multiply $625 x 24 months, and that contract is worth $15,000 to you.
In each example, the value of a new client or customer (also referred to as client lifetime value, or LTV) is $15,000.
Now that you understand that, you can begin to calculate or estimate what you can afford to spend on acquiring each new customer.
Would you spend $1,000 to acquire a client that is will bring you $15,000 in profit? How about $5,000? Or $10,000?
Only you as the business owner will know that answer.
And I’m not talking about cost per lead here. I’m talking about the cost to actually get a signed contract with a new customer.
How Do You Calculate Your Max Cost of a Lead?
If you want to calculate cost per lead, you will have to figure out your conversion rate. Your conversion rate is the rate at which you convert leads into customers. For some businesses, it’s 10%. For some, it’s 80%.
Example: If 1 out of every 5 leads that you get turns into a customer, your conversion rate is 20%. If you previously determined that you are comfortable spending $5,000 to acquire a new customer, you can afford to spend $1,000 per lead.
This is why I am dumbfounded when contractors say they have nothing in the budget for lead generation or marketing, until they begin to see how everything fits together.
Once you understand this basic concept, you can begin to develop a marketing campaign to attract more of your ideal clients. You can sleep well at night knowing that you’re working the numbers, and that as long as you work smart and consistently market to your ideal clients, the numbers will take care of themselves.
But wait, before I let you go, there is one HUGE thing to note here. Much of what you do in terms of marketing or lead generation may cost you nothing in out-of-pocket, but you need to factor in your TIME. Your time, or your staff’s time, is worth a lot. As business owners, we sometimes forget that. But we need to factor in the value of our time as a cost in everything we do.
Does this make sense? Feel free to discuss, or dispute my math, in the comments or contact me to do the math for your contractor business.