Mike Andes explains why most home-service businesses fail at marketing: they don't know their Customer Acquisition Cost or Lifetime Value. He shows how a $100 acquisition cost on a customer worth $2,000 annually over five years creates real ROI, and why 95-99% of firms are just guessing their marketing spend.
Biggest advertising mistake I see is not knowing your customer acquisition cost or your lifetime value. You'll hear this referred to as CAC, customer acquisition cost, and LTV, lifetime value. The reason you gotta know this is 'cause this is the input and output equation, meaning if I spend a certain amount of money, that's my customer acquisition cost, you get one new customer, how much money will I make from that customer over the course of their lifetime? For example, if I make $2,000 in revenue per year per customer and I keep customers on average for 5 years, I would make $10,000 in revenue. Let's assume I'm 20% profitable. That would mean that I made $2,000 of profit on that customer over the course of the 5 years that they stayed with me. Now, if I spend $100 to get that customer and in exchange, over the course of the next few years, I'm turning that customer into $2,000 of profit, That's a great return on investment. But if I don't know my input, my customer acquisition cost, and I don't know my output, my lifetime value, again, I'm just guessing. And I would say 95% to 99% of home service businesses, depending on the industry, are just guessing with their marketing dollars because they don't know their customer acquisition cost, how much money I put into the machine to get one new customer, and they don't know their lifetime value. How much money does every single customer net me over the course of their lifetime? And in order to know that, especially if you have recurring revenue, you can't just use the average ticket. If you have a one-time service, for example, garage installation, garage door installations, or even parts of HVAC or plumbing, electrical, like someone's installing their electrical, usually one time. So you can look at the average ticket. But if you have a recurring service where you're coming on a weekly, biweekly, monthly, quarterly, annual basis, I want to know how long do they stay with me? So to determine my lifetime value, I need to know how long do they usually stay with me? How many times do they usually buy from me? Even something like Christmas lights that might be more of an annual thing. If on average customers spend $1,000 per light install, but on average they stay with you 3 years, you can then assume you're making $3,000 of revenue. And if you're 50% profitable on those— that service, That would mean $1,500 is your profit. So if I have to spend $100 to get the customer, acquisition cost, and at the end of the day, 3 years later, I am making $1,500, I can now at least make an assessment as to whether or not that is a good enough ROI for me to keep spending money on marketing. If I don't know those numbers, I am guessing.
