Nothing works without customers. In principle, this is always correct. Nevertheless, there are business areas and cases in which it makes more sense to forego the acquisition of new customers.
I’m not thinking of complicated principals. Nor of difficulties in working with new customers. Or to defaults. Such things are usually unpredictable. They are part of any business activity. There is a much more important question at stake here: when is it right to seek new business partners in view of the costs involved? How can I determine this as a service provider in film and video?
You need to know
- Not every new client automatically brings a video production a profit. For a realistic cost consideration, the effort for customer acquisition must also be included.
- It must also be analysed how many of the newly acquired customers become regular customers. Some of the new customers will naturally move on after the first order. You also need to factor this percentage into your customer acquisition effort.
- If you know your cost of acquiring new customers, you may find that you have more business success by forgoing certain customers.
How much does a new customer cost?
Many video producers will answer the question of whether it makes sense to acquire new customers by looking at the volume of orders. This can be easily determined for both clients and video producers with the online film cost calculator from Filmpuls before the contract is awarded. Then usually follows the argumentation with the utilization of own capacities. Equally important, however, is what it costs to acquire a new client in the first place. Newly founded production companies should not forget that there are also initial investments to be paid back – especially the acquisition costs for professional film equipment are high.
Just as a film can be calculated, there is also a simple calculation method for the acquisition of new customers. This article is intended as a guide on how to answer these costs mathematically.
Anyone who is responsible for acquisition or who generates their own salary needs to know the cost of acquiring new customers. Marketing and accounting will thank you later. There is no other way to successfully pursue acquisition and meaningful advertising on one’s own behalf.
Determine costs for new customer acquisition
There are three simple considerations and questions to start with when acquiring new customers:
- Firstly, how much effort is required to convince a new client of my qualities?
- Secondly, what will I earn at the end of the day with this business partner and with this first order?
- Thirdly: How many additional orders can I expect after the first successful cooperation and over what period of time?
The first answer is quickly calculated and answered. After all, it is a question of comparing the total investment in figures with the number of new customers generated as a result. If it costs me 100 and two new customer relationships come out of it, one customer relationship costs 50 (100 divided by 2 new customers = 50).
In practice, this effort (one’s own costs) for acquiring new customers consists of everything that precedes the new production order. This could be the cost of advertising materials such as creating showreels, placing ads online on Google or on a website, salary and staffing costs, phone costs, or for sales.
Business economists refer to the costs of these efforts in acquiring new customers as customer acquisition costs. The English Customer Acquisition Cost (abbreviated CAC) means the same thing. This manual uses both terms.
Knowing that a new customer relationship costs X or Y answers question 1.
The only thing is, this answer doesn’t pay rent yet. The 50 per customer in our example is just an auxiliary number. We’ll need these later. So the next thing is to find out what the value of the first order (question 2) is for a video and the potential for future orders (question 3). If one knows also these two values from the bookkeeping, one can put it afterwards successfully in relation to the costs of the order acquisition and draw from it important conclusions and realizations among other things for the finances, marketing and selling.
How much is a customer worth in calculative terms?
The Customer Lifetime Value (CLV) is made up of the first order for a video and the volume of orders expected in the future. The amount of the first order corresponds to the contractually agreed price. It’s easy to determine. It will be more difficult with orders that may follow in the indefinite future. The answers here are based on assumptions and projections into future customer behaviour.
Customer value assumes that new clients will remain loyal to the contractor and continue to produce video with them. If you don’t like to be a fortune teller, you can still use the following examples. In this case, you simply answer question 2 (current turnover of the new project). You just leave out the forecast of future sales.
The higher the order volume (concrete and in the forecast), the better. This makes immediate sense. Nevertheless, sales are of limited interest in this guide to analyzing new customer acquisition. Much more important than the turnover is how much of the turnover remains in your own cash register. 200 sales to end up spending 200 is entrepreneurial suicide.
Customer value therefore works with contribution margins (DB) when acquiring new customers. Small companies that do not use contribution margin accounting can also use mark-up or profit instead of DB. What matters is what is included in that number (contribution margin, markup, or profit). The main thing is to operate with net amounts.
Industries and companies outside of film and video calculate customer value far more intricately. Here, in addition to the acquisition costs for the individual customer, not only DB1, marketing and customer care costs are taken into account, but also, among other things, discount rates over the period under consideration and other elements.
Instructions and examples
With an investment of 50, Videoproduktion ABC succeeds in winning 2 new customers. The expenditure for new customer acquisition thus amounts to 25 (50 : 2) per customer. The new customers each bring an order volume of 150 per year and they remain loyal to the company for 1 year. The production company generates an average net contribution margin of 30 % from these 150 order volumes per customer, i.e. 45 (30 % of 150).
The customer value per year is 45. The ratio between customer value and customer acquisition costs is 45:25, which is 1.8. The newly acquired customer easily makes up for the effort that had to be invested in order to win him over for the cooperation.
With 50 efforts Videoproduktion DEF succeeds in winning 2 additional clients. The new customers each generate an order volume of 150. They remain loyal for 2 years (instead of only 1 year as with the ABC production company). This time, the production company works out an imputed net contribution margin of 30% on average and 45% per customer. The customer value is 45.
Because no money has to be invested in acquisition in the following year, the customer acquisition costs are halved (25 for 2 years equals 12.5 per year). Customer value and customer acquisition costs have a ratio of 45:12.5, resulting in a nice 3.6.
With an investment of 50 it can attract video production GHI 2 new business partners. The additional clients each result in an additional order volume of 75 per year (instead of 150 as with the production companies ABC and DEF) and remain loyal for 1 year. In turn, the production company earns an average net contribution margin of 30 % from its customers, i.e. 22.5 per year.
The value of the principal is 22.5. Customer value and the effort to acquire new customers in relation results in only 0.9.
New customer acquisition: Learnings for video providers
Customer value combined with customer acquisition costs (CAC) can, with some experience and insight into an industry, provide valuable insight into the health of a business unit. High costs for acquisition, marketing and advertising, low volumes and limited customer loyalty are a dangerous mix for market participants. This guide also aims to raise awareness of this. Here are three tips:
If in example #1 the acquisition of a third new customer fails, for which also 25 were invested, the video production company ABC can cope well with this expenditure (3 x 25 = total 75 expenditure, 2 x 45 = 90 income).
In example #3, new customer acquisition costs are not recovered. The new customer must, as far as possible, be cross-subsidised from other sources of revenue.
CAC and CLV must be in balance when acquiring new customers. A value of 1 (profit costs divided by customer value) allows the existing business model to be continued.
With a value above 1, the finances allow room for further development of the business model. They enable successful survival in tough cut-throat battles, a higher salary or expansion into new markets, or higher spending on self-advertising online on a website or Google.
If the customer acquisition costs fall short of the customer value, the problems are already lurking at the door, and not only for narrow-track filmmakers. In this case, there is only one thing that helps: immediately go over the books and absolutely work out new scenarios so that you don’t get caught cold in the future: costs must be reduced and alternative ways of acquiring new customers must be found.
Conclusion for new customer acquisition
When calculating future orders, depending on customer satisfaction, it can be assumed that fewer resources will have to be used to acquire new customers than for initial acquisition in order to maintain the cooperation. Ideally, the customer relationship will even continue without further investment.
This article was automatically translated into English using AI. If you would like to help us improve the quality, we would be happy to hear from you.