What Can You Spend To Acquire New Customer Calculator

What Can You Afford To Spend To Acquire A New Customer?

Using Life Time Value, this calculator will help you determine what you can afford to spend on acquiring new customers. The calculations are based on the life time value of your customer, rather than some arbitrary amount based on percentage of revenues, etc.

First, you calculate the Life Time Value of a customer, which is the monetary value of a customer over their lifespan as a customer. And, based on the calculated result, you can determine what you can afford to spend on new customer acquisition. The default acquisition cost spend as a percentage of LTV is set at 10%, but you can change it fit your situation or do "what-if-analysis," based on various percentages. To determine your total promotional cost spend for the period, enter the number of new customers you expect to acquire during this period.

See definitions below the calculator for clarification of terms used.

You may reset all factors to "0" to start over or when you are finished using the tool by clicking the RESET button at the top (or bottom). You can print a copy of this analysis by clicking the PRINT button at the top (or bottom). You can also save the evaluation to your browser if you're not able to complete it in one sitting or want to do different calculations later. Just save the results, then open the saved URL later. If you'd like an excel version of this calculator, send your request via email to info@dwassociates.com. Include the name of this calculator in the subject line of your message.

Enter
Average Life of a Customer (Yrs.)

Enter
Average # of Purchases a Year

Enter
Average Value of Purchase

Enter
Gross Margin % of Purchase

Enter
Retention Rate*

Enter
Inflation Rate *

Enter
Discount Rate *

Change in Value of Customer Purchase

Discount Rate per Period

Net Present Value of Customer Purchase Stream (LTV)

Enter
New Customer Acquisition Cost Spend Percentage

Allowable New Customer Acquisition Cost Spend per Customer

Enter
# of New Customers Projected for Period
(Default Set To 10%)

Total Allowable Promotional Cost Spent for Period for New Customer Acquisition Based on Customer LTV

If You Know What Your Current Planned Budget for Customer Acquisition is
(Enter Here)

Variance from Allowable to Actual Planned Budget

Definitions:

Life Time Value (LTV): Is a term used to describe the monetary value of a customer (their purchasing) to a company over the customer's lifetime as a customer. Customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

Period (Life of Customer in Yrs.): The unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 3–7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.

Retention Rate: Retention, or customer retention in this case, refers to the percentage of customer relationships, that once established, a business is able to maintain on a long-term basis. For example, a company only retains 90% of existing customers a year. They could be lost for a variety of reasons, defection to other companies, death, etc. The opposite of retention rate is ""churn rate,"" which is the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. This model uses retention rate, although most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship.

Inflation Rate: The percentage increase in the price of goods and services, usually annually.

Discount Rate: The cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.