What Will It Cost To Grow Your Business?

Does this sound familiar?

You want to grow your business, but you’re not sure where to begin. You’re considering how to invest in additional marketing to increase revenue while getting a good return on your investment.

You may be asking these questions: What is the cost of growing my company? How much do I need to invest in growing my business? How long will it take before I realize a return on my investment?

A couple of essential metrics can help answer these questions – Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).

A Case Study – Sierra Peak Winery

Sierra Peak is a third-generation family winery located in Apple Valley high in the Sierra Nevada foothills. The Walker family planted their first vines in 1975 and opened the winery in 1980. Robert Walker became CEO of the family business in 1990.The Walker family welcomes visitors each day to their tasting room and hosts business events, weddings, and summer concert series at the winery’s stunning location.

Sierra Peak also offers wine club memberships at $500 per year. Members receive five bottles of Sierra Peak wine, selected by the Winemaker, delivered four times each year; 20 bottles total at $25 per bottle. In addition to the wine, wine club members receive benefits that include a complimentary tasting of Limited Reserves, invitations to private Friends of Sierra Peak Special Events at the winery, advanced notification about Regional Sierra Peak Winery gourmet events, and a 20 percent discount on all Sierra Peak wine purchases.

Due to restrictions related to the COVID-19 pandemic, Robert closed the tasting room and discontinued live events. To help maintain the family business, Robert got creative, and soon after the pandemic hit, he began cross-marketing with local restaurants by selling wines that complemented the restaurants’ menus. At the same time, Sierra Peak has experienced an increase in online sales and wine club memberships. In addition to helping survive the pandemic, wine club memberships are an attractive recurring revenue business model.

Robert’s looking at further options that include hosting virtual events to form connections with his existing customers. The limitations of in-person events would not impact virtual events, and he can attract a broader audience than he may have been able to otherwise. Not only will Robert sell his products at these events, but he can also collect the email addresses of attendees to build his list and craft an event follow-up campaign to continue engaging them later. He’ll also have the chance to get to know his customers in a fun, laid-back environment, providing him with firsthand knowledge that would be otherwise hard to get.

In addition to virtual events, Robert wants to become a source of knowledge. He wants to leverage his website, blog, social media channels, and expertise to create a library of interesting and easy-to-read content that people will want to turn to for insight and build a loyal brand following.

Robert is considering hiring a Digital Marketing Manager to increase online sales further and grow the number of wine club memberships.

Customer Acquisition Cost (CAC)

With a contract Digital Marketing Manager and focused quarterly marketing campaigns, Robert believes that Sierra Peak can increase the number of wine club members by 700, from 1,800 to 2,500. The manager would cost $50,000 per year, and quarterly marketing campaigns would cost $2,000 per quarter. The total cost to acquire 700 new customers is estimated to be $58,000 for the year. The per Customer Acquisition Cost (CAC) is $82.86, which equals $58,000 divided by 700.

Customer Lifetime Value (LTV)

The average wine club member spends $650 each year on Sierra Peak products; this includes the $500 annual membership and $150 for additional purchases. The club is a recurring revenue model, the length of the average wine club membership period is eight years. The average wine club member generates $5,200 of revenue. Sierra Peaks’ profit margin is 20 percent. A wine club member generates $1,040 in profit for the business over eight years.

Based on Robert’s estimates, the additional cost to grow the wine club using digital resources is a good investment. The 700 wine club members would generate $728,000 in extra profit from recurring revenue. Some of the digital resources would also be evergreen content that can be used to attract additional wine club members and online purchases with no added investment.

To avoid surprises and before taking on additional marketing costs, estimate your Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV).

* Fictitious names and scenarios were used for this example.