The Cost of Acquiring a Customer

There is a large number of measures within your business that you can measure. Things like the lifetime value of a customer, or tracking your employee’s key performance indicators, plus many others. However one key cost that many business owners do not realize, is that of acquiring a new customer. The theory that you open your doors and a new customer walks in and there has been no cost in acquiring that customer is greatly misleading.

There are many cost that are associated with acquiring a new customer. Additional they are many ways that you can work out the cost of acquiring a new customer, this greatly depends though on if you know how you acquired the customer or if they are what appears to be a walk in customer.  To set the scene, imagine that you have opened a brand new retail store. You can only afford the lease on a store just outside the main shopping area, with almost no passing foot traffic.

The first question you need to ask yourself is how do i acquire new customers and what will it cost me. Obviously if you have not much passing foot traffic there is little chance people are going to walk in and it has literally cost you nothing to acquire this customer, although it is possible there are ways that you can improve your chances. Again you have two options, things that are going to cost you once, and continue to attract customers over a longer period, and other things that you pay for each month or week which will only generally attract customers over a limit period.

EXAMPLE 1

The most economical first option to consider is building signage, if you don’t have passing foot traffic, there is still a good chance that there is plenty of people driving past.  Unless you really are in an out of the way back street. For the most part purchasing a few good signs for the building and maybe an A-Frame sandwich board for the footpath, will let anyone know that gets close enough to your business, that you are there. Depending on what you can afford to do, this may cost anywhere from $500-$5000 (maybe more if you really do a good job). Generally this is a one time cost, you may need to spend a little from time to time to update it but this will be minimal compared to the initial cost.

So now you may be asking how do i convert the cost of the signage into a cost for acquiring a customer. Well in reality this is kind of difficult. However there is options that you can use to at a minimum have some idea. If for example your investment is taken over a 5 year period. Each year you gain 750 customers who come to your business purely because they have seen the sign’s and never heard of your business before. Over the 5 year period this converts to 4500 new customers. If you had initially spent $5,000 for the signs, then your cost per customer over 5 years would be about $1.11 per new customer. In this case this is a fairly low cost for a new customer, and something that you should easily be able to recoup in a single sale from the customer.

Having a fixed cost, long term method for attracting customer will always be the best value as the number of new customer’s is not really fixed in anyway to a recurring cost. However an advertising in a newspaper or magazine, gives you a much shorter span of time to recover the cost on a per customer basis.

EXAMPLE 2

If you decide to advertise in a magazine each month with a full page advertisement, The full page ad may cost you $800.00 for one month. By tracking the number of customers that come from this ad you realize you have gained around 50 new customers for the month directly from this advertisment. This converts to around $16 per customer the ad has cost you. When you compare this to the potential of signage, the cost per customer is much high, in fact around 14.5 times the price per customer. This is where it is important to consider the potential profit from a single sale or more so the potential life time value of the customer.

While this post is not actually going to go into detail about the way to calculate the lifetime value of a customer it is something that needs to be consider in connection with the cost of acquiring a customer. If you are paying $16 to acquire one customer by advertising in a magazine, are you able to recover this cost in the potential they may spend. If your average sale is $30 with a 50% profit margin, then you are making a small loss on the first sale, however if this customer returns every month and spends around $30 then the cost of $16 to acquire the customer is quite small in comparison to the potential profit over a 2 or 3 year period.

EXAMPLE 3

One final example may be a flier drop. If you drop the fliers to all the houses in a 3 km radius, you may need to have 1,500 fliers printed, and pay for them to be dropped into people’s mail boxes. Printing May come in at $60.00 and delivering them might cost you another $200.00 (dependent on how you have them delivered). The actual number of customers who respond to the flier is about 3% or about 45 new customers. Dividing 45 new customer by $260 gives you about $5.77 per new customer as your cost.

DON’T MISTAKE IMPRESSIONS FOR CUSTOMERS

Probably the biggest failing point in working out the cost of marketing is looking at marketing from a point of view as a cost per impression (or how much it costs you for one person to see the information).  For example in the last example, you are potentially getting 1500 impressions, which works out at $0.17 per potential customer, while if you were really good at marketing and really lucky you could have all these people come through your store and purchase the chances of that happening are quite remote. This is why it is important to bring it down to actual customers generated from a particular marketing event.

TRACK YOUR MARKETING

In a few days i will post a little more about some different ways that you can better track which marketing campaign is working and which may not be. I need to research this a little to try and get you as much information as i possibly can.

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