Determining how to split your marketing budget is a tough call for any business: do you invest in a highly-targeted Pay Per Click campaign to generate new customers, or do you focus on the ones you already have via dedicated email marketing?
You can’t afford to stand still, but neither can you neglect your existing customer base; to determine how you should split your budget, we’re going to look at the different costs and benefits associated with marketing to both current and new customers, and how you should consider dividing your spend.
How valuable is new business to you?
Firstly, to understand how much you should spend on new business you need to know how valuable new customers are to you. The two metrics you need for this are the Customer Acquisition Cost (CAC) and the Customer Lifetime Value (CLV). The CAC is how much you must spend to acquire each new customer, and the CLV is how much money you can expect to make from them; ideally, your CLV will be about triple the CAC, which is a healthy ratio of investment to return.
Calculating your CAC and CLV accurately is vitally important when setting your marketing budget; understanding how profitable each new customer is lets you plan expansion and allocate your outgoings accordingly.
Who’s important, new customers or existing ones?
This isn’t an either-or scenario; whatever your plans are for expansion you’ll need to obtain new customers and maintain your customer base simultaneously – they’re both equally important to the success of your business. I always tell clients they should divide their marketing efforts evenly between both new and current customers, but, and this is crucial, they should expect to spend 70% of their budget on new business as it’s substantially more expensive to obtain. Because marketing to existing customers is so much more effective, you can achieve the results you need with just 30% of your advertising budget, but it’s crucially important to maintain customer loyalty.
Why are new customers so expensive?
Marketing to new customers is more expensive because your advertising is less effective; it’s estimated that you need to present marketing material to consumers seven times before they begin to recognise it, which means that by the time someone’s become a customer all the hard work’s already been done - it can cost five times as much to sell to a new customer as to an existing one, and existing customers also tend to spend almost a third more than new ones. However, depending on your annual ‘churn’ rate you’ll be losing existing customers, so you’ll need to replace them with new ones just to maintain the current level of business.
When should I invest more in marketing to new customers?
This 70/30 budget split works very well for businesses who desire modest, sustainable growth - about 20% per year, which isn’t bad at all. However, if you have to grow quickly, you’ll need to invest significantly more in the acquisition of new customers; companies who are just starting out and those looking to rapidly expand should invest heavily in marketing to new business.
Why is it cheaper to market to existing customers?
Marketing to existing customers is more effective, more efficient and more profitable than to new ones because all the hard work’s been done already! You’ve established brand trust and developed a relationship with consumers which allows you to sell to them much more easily, and with the detailed data available from online marketing you’re able to target them very effectively as well.
When should I invest more in existing customers?
If your customers have a high CAC and CLV, you’ll need to do your absolute best to retain them, especially for customers with a long potential lifetime; if you spend heavily to acquire a new client but lose them after a year, you won’t see a good return on your CAC. If you’re seeing a high level of churn you should also consider investing more into retaining current clients and loyalty schemes (calculate your churn rate here).