- Now the right approach to paid advertising
is different for every business.
There's really no one size fits all answer
to when the timing is right to invest money
into paying for advertising.
Now you're of course looking
for a return on your investment.
So you need your investment in paid advertising
to deliver sales at a price that keeps you profitable.
If you believe that you can turn a profit paying for ads,
well, the timing is right.
To be successful at paid marketing
you need to have a sustainable margin
between your customer acquisition cost, or CAC,
and the lifetime value, or LTV or CLV, of your customer.
But that margin has to be realistic
for contributing to your business goals.
How much you're willing to spend
is very dependent on your goals.
Some marketing campaigns intentionally operate
in the red because they may contribute
to a larger goal or initiative that will pan out over time.
Now customer acquisition cost is the total cost
to acquire a customer.
It's all of the marketing dollars that you spent to
generate that conversion.
And it's a key metric that you'll need
in order to measure profitability for each paid channel.
A lower customer acquisition costs leaves more money
in the bank to allocate towards acquiring,
well, more customers.
Now a good rule of thumb is to get
your customer acquisition costs
down to 1/3 of your lifetime value.
One thing I want to point out is that it's really easy
to interchange customer acquisition cost
with cost per acquisition.
Your CAC is measuring the total cost to bring in a customer.
This is a combination of all
of your marketing and sales costs.
Your CPA is measuring the cost to acquire something,
perhaps a registration, a web sale,
an email subscriber, a lead, and so on.
Now in paid advertising you might have a CPA
for your search advertisement
but you have had other costs to develop that campaign
such as paying a designer or copywriter.
Roughly put your cost per acquisition is from
that click to a purchase.
Whereas the customer acquisition cost
is all of the costs, including that CPA.
When building a marketing strategy
it's important to look at these two metrics differently.
Andrew Chen has a great worksheet
that you can use to factor in the right way
to calculate CAC for your business.
Be sure you're keeping tabs
on your customer acquisition cost
and your cost per acquisition,
and keeping it all in check as you trial
your different marketing initiatives.