The number one topic shared here on the blog and discussed with clients at Marketing Funnel Automation is customer acquisition.
New customers are the lifeblood of your business. The online marketing game is all about acquiring those customers then getting them to spend more with you over the time of their patronage.
Simple, right?
However, there are three very different ways you can approach customer acquisition depending on where you are in your business and how serious you are about growing your revenues and profits.
The first level of acquisition aggression is about determining what you’re willing to invest to acquire a new customer.
It’s about determining your maximum cost per acquisition, the maximum amount that you’re willing to invest to get a new customer.
Customer Acquisition Aggression – Level 1
The “mom-and-pop” entrepreneur looks at it like this:
“Well, if every customer is worth $50 today, then every new customer is worth $50, if that’s what they spend with me.”
The mom-and-pop look at it as I want to generate a profit and so I’m only willing to spend maybe $25 to get a new customer today that spends $50 with me.
This way I know that every new customer I get, I immediately make $25. I spend $25, they’re worth $50 on average today, and then they’re going to be worth some undetermined future amount.
That’s the way the typical mom-and-pop entrepreneur operates, and they don’t understand the difference between the front-end and the back-end.
They don’t understand the difference between acquisition and monetization.
Customer Acquisition vs. Customer Monetization
The typical mom-and-pop entrepreneur looks at all marketing exactly the same. Whether you’re marketing to an existing customer or a prospect, they see that as the same thing.
That’s what the mom-and-pop think.
They think it’s got the same objective, the same goal, “we’re just looking to generate a transaction,” whether it’s the 10th transaction or the 1st transaction.
Because to the mom-and-pop, they’re looking for a profit on every transaction…
…and that’s NOT the way to approach customer acquisition if you want to grow your business like crazy.
The Problem With “Mom-and-Pop Mentality”
Customer Acquisition
Problem is, for the mom-and-pop they’re only willing to invest $25 to get a customer that’s worth $50 today (even though that customer is also worth say $500 in the future).
Remember: when it comes to customer acquisition, we are not marketers… We are investors.
This puts the mom-and-pop at a disadvantage because they’re only willing to spend $25.
Because an investor, even a somewhat astute investor, would realize:
“Well, my gosh, would I be willing to spend $50 today to get an asset that is worth $50 today, but is also worth $500 in the future?”
Think about that for yourself…
Would you be willing to invest $50 to get an asset that is worth $50 today, meaning it puts $50 back into your pocket today, and then puts another $500 into your pocket over the next year?
The answer is of course you would!
That is the equivalent of acquiring valuable assets for FREE.
If you invest $50 to get an asset that puts $50 today into your pocket, you are now at breakeven!
Yes, that is something to celebrate.
Why?
Because it didn’t cost you anything.
Your bank account is the same. Except the difference now is that you have an asset (a new customer) that’s going to be worth MORE money to you over the coming months.
And so over the coming months, you’re going to bank additional profits on that.
You acquired a valuable asset for free and then it became worth more money to you over time, because customers are appreciating assets.
They go up in value.
The mindset of being willing to break even on customer acquisition is the second level of acquisition aggression.
Customer Acquisition Aggression – Level 2
Acquisition aggression level two is where we are willing to breakeven.
We’re willing to invest, whatever it is that the average customer is worth to us today (what we call day zero) in order to acquire them.
In this example, if the average customer spends $50 with us during their first transaction. Level two of acquisition aggression means that we’re willing to invest $50 to get that customer.
We break even. Zero profit.
Why would we be willing to do that?
Because we know that customer is an appreciating asset. They’re going to be worth more money to us in the future, specifically in this example we know that average lifetime customer value is $500. We invest $50 today and we get $50 back from the new customer today.
We’re at breakeven, bank account no less today than it was yesterday, except now we’ve got this asset that we know is going to kick off an additional $500 to us over the coming weeks and months.
Which Level of Acquisition Aggression
Would You Rather Operate At?
Now, the thing that I want you to ask is: who is in a better position?
The mom-and-pop who’s only willing to invest $25 to get a new customer (that same new customer) or the entrepreneur that’s operating at that second level of acquisition aggression, who’s willing to breakeven?
Well, of course you should see the competitive advantage is way slanted in favor of the entrepreneur operating at that second level of acquisition aggression because at that second level, he or she is willing to invest double.
If you can spend double what it is that your competitors can invest to acquire a single new customer, you are going to crush them, all else being equal.
If they have the same average front-end transaction value, that same $50 value today, and they have the same future, average lifetime customer value as you do (in this example $500) and you are willing to invest three times what it is that they are to get a new customer, you are going to crush them.
They’re going to be dominated.
You could do two times what it is that they’re willing to do.
You can use platforms that they can’t afford to use, you can afford pay per click prices that they can’t, you can afford to do direct mail, you can afford to pay somebody on your team to call prospects, you can do so much more if you’re willing to invest double what the mom-and-pop is.
That’s why you’re able to acquire more customers than the mom-and-pop when you operate at that second level of acquisition aggression.
Frankly, that’s where I start most students and clients.
Most students and clients, and possibly even you, are safest at that second level of acquisition aggression.
It’s the safest bet because it’s allowing you to acquire new customers for free. Your bank accounts, no less. Like I said, you’re at breakeven, and that’s great, you’re acquiring valuable assets at no cost to you.
Customer Acquisition Acquisition – Level 3
But, then we’ve got the third level of acquisition aggression, and the third level of acquisition aggression is really where we start to see that investment mentality.
The way I think of it: I’m buying customers. In fact, I’m going negative.
What this means is that at the third level of acquisition aggression, you are investing more for a customer today than what that customer spends with you today.
In our example, you’d be investing more than $50 to get a new customer today.
You might be willing to invest $55 to get a customer today, so $5 is coming out of your bank account for every new customer you get.
Why would you be willing to do that?
Simple.
When you think like an investor, remember that asset is worth $50 today but over the coming weeks, months, and years, it’s worth an additional $500.
So in essence, you’re going negative by $5 today to get an asset that is worth $500 over the coming weeks, months, or years.
Really, you’re only investing $5, it’s costing you today $5 to recoup $500 over the coming year, the question I would ask you is this…
Would you give me $5 today if in a year I’d give you back $500?
Obviously, YES!
The only question is, how often would you do that?
Again, simple answer:
As often as possible based on the amount of capital that you have.
I share that in this context because from an investor’s perspective, if you can invest $5 today and get $500 back in a year, that’s a great move for you.
That’s a great value for you.
Only a knucklehead investor wouldn’t move forward with that.
WARNING: Only “Qualified Investors” Can Participate
You have to be careful with this because there are two criteria for moving forward with this type of acquisition aggression or acquisition mentality.
You need to know two things:
First, you need to know your numbers accurately. You need to know what a customer is worth today and what your average lifetime customer value is.
If you don’t know what the average customer is worth to you and your business, you CANNOT and SHOULD NOT move forward with the third level of acquisition aggression.
Start with the second-level, break even.
You should only base your acquisition costs on what a new customer is worth on average to you day zero, the first day that they become a customer with you.
Second, thing you need to know to be able to use this third level of acquisition aggression, is how much cash do you have on hand.
Because only a mature cash flow positive, really cash flush business, should be using the third level of acquisition aggression.
Your Risk at Customer Acquisition Aggression Level 3
If every time you acquire a customer, $5 comes out of your bank account and hypothetically that you don’t recoup the $500 you projected.
In our example here, $5 comes out of your bank account, and you don’t get that $5 back for another two months.
If you acquire 1,000 customers today, which right on the surface seems like a great move, it means $5,000 just went out of your bank account and you’re not going to see that $5,000 come back for another two months.
Now, if you do that every day and you don’t have enough cash, you will run out of capital.
You can only afford to use the third level of acquisition aggression if you have the cash to float, if you can float that kind of money until you bring it back.
If not, you can run out of money. It’s why there are companies that are profitable on paper (according to their financials) but they go out of business because of cash flow, meaning they just run out of money before they’re able to collect on their sales (those are companies that are using accrual based accounting).
Bottom Line: Metrics Determine How Aggressively You Grow Your Business
Recap: In order to use the third level, you need to know your metrics.
Know your front-end transaction value, know your lifetime customer value and know that you’ve got the cash to float.
If you don’t know any of those things, then you need to operate at Level 2.
Nobody reading this should be operating at that mom-and-pop level (Level 1).
All of that being said, it comes down to this…
- Identify where you are at and what level of aggression you’re going to use.
- Then determine what is the maximum amount of money that you are willing to invest in order to acquire a new customer (maximum CPA).
Two Growth Insights Gathered from Your Maximum CPA
There are two meanings hidden inside in that maximum CPA number.
First, what’s the maximum amount that you can afford to spend at Level 2 of Customer Acquisition Aggression?
Easy. The average transaction value.
The average amount of money that a new customer spends with you is the maximum amount that you can invest to acquire a new customer.
But there’s a second meaning or directive behind the term…
You want to grow it that number, you want to always be pushing the amount of money that you can afford to invest to get a new customer.
Even at that second level of acquisition aggression, you can push how much money you can afford to invest.
How?
By working on increasing what the average new customer spends with you.
If the average new customer spends $50 with you today, your job, if you want to stay at Level 2 of acquisition aggression, your job is to work on increasing that 50 to 52, to 53, to 54, to 55, to 60 and beyond.
How do you do that?
You increase that transaction value with things like a bump offer, an upsell, a down sell, a cross-sell, a second chance offer, there’s multiple ways to do that, to increase average transaction value… but that is a discussion for another post.
For now, stay focused on knowing your metrics so you can climb the levels of Customer Acquisition Aggression to grow your business faster and destroy your competitors.
Talk soon,
Todd Brown