Do you know what each new customer costs your business? If you’ve never thought about this equation before you are most likely wasting dollars where you shouldn’t be and not spending enough in other areas. Customer acquisition cost is one of the most important equations that you need to understand to succeed in business.
In this post, I’ll share with you how I think about customer acquisition costs and how that drives my entire business model. I believe that you’ll have a new perspective and new tools with which to run your business after you look at it this way as well. Let’s get started!
1. Upfront Cost
The first thing you need to consider when you’re figuring out your customer acquisition cost is how much money you spend on the front end to purchase them. What are examples of front-end costs? Here are a few to get you thinking:
- Salespeople’s salary and commissions
- Advertising dollars
- JV / Affiliate Commissions
- Administrative and overhead costs that affect the above-mentioned areas
- Research costs for launching new marketing or new products
When you consider the five items above, which ones apply to your business? Let’s imagine that you’re selling a product where you have salespeople and advertising in play. We’ll keep it simple and work with those two upfront costs. We’ll imagine that you are selling promotional materials like pens, mugs, and scratch-off prize tickets. You have t-shirts and notepads and products like that businesses use to promote themselves.
Let’s work through the math together now, so you can figure out the same equation in your own business. Remember to estimate these costs. Don’t worry about having exact numbers at first, you can get to those after you estimate costs.
Do Some Quick Math:
Imagine that you have one saleswoman selling your product named Sally. She costs you $55,000 per year and due to her sales efforts you sell to four new customers a month. The average sales to that customer are $400, so each month she is generating four new customers and $1600 in new revenue.
Without advertising dollars, where is your customer acquisition cost? If you do the math in your head (which you should) you can estimate roughly that her salary divided by two is $27,500. Round that up to $30,000 and divide that by six months for half a year and you have $5,000. We know it’s a little lower, but let’s leave it there. It’s good to estimate these numbers in your head or on paper because you need to start thinking about numbers in a new way.
Now that we have her cost at $5000 per month let’s approximate the average sale $500 to make this math simpler. You spend $5,000 for four $500 sales, but before we get too far there, what are we focused on calculating? We are looking for the customer acquisition cost, so once again, let’s adjust our numbers in our heads to make it simpler. Instead of four new customers per month, let’s say it’s five.
In your imaginary company, each new customer costs you $1000 to purchase, without advertising costs. Now let’s add in a $1000 a month advertising spend. You are buying $600 in radio ads and $400 in pay per click ads. $1000 divided by five equals $200. We now have our total acquisition cost at $1200 per customer.
Working your way through this math equation gives you the upfront cost for your customer. Run through some quick math on your company’s acquisition costs right now. Remember you can adjust the numbers to make it easy to do in your head. You need a high-level perspective right now, not a detailed report from your accountant.
2. Why Does This Cost Matter?
If you aren’t thinking about this important math problem every day in your business, your competitors are stealing your customers, and your investment dollars are walking away without anything or anyone to stop them. You must know what it costs to buy each customer because this affects every other part of your business.
Let’s go back to our promotional products company. Sally is selling for you, and you have advertising dollars going out each month to support her efforts. Remember that it’s important to have dual sales channels running if you want to accelerate cost and lower the purchase cost of a new customer. The total new customer cost is $1200 a piece and each new customer spends $400 to $500 on their first order. Your profit margin on the order alone (without Sally and advertising dollars) is 20% or $100 per order.
Looking at this model, how many orders do you need to have with that customer to make them a profitable account? 12 orders brings you to break even, and every order after that is positive profits.
How many times per year will this customer order? Before we answer that, make sure that your company can:
- Provide outstanding products and services
- Differentiate yourselves from your competitors
- Give Sally time each month to maintain and retain that customer
If you can do those three things very well, then we can optimistically estimate that you can get a new order every month from your new customer. We’ll keep this very optimistic view for now because we want to make sure our math is clear and simple for the time being. We can go back and refine it later, but remember that you need to get very good at this kind of math, so working it out in your head is important.
So where are we at now? We have found our cost is $1200 to purchase each new customer. We know that if we work hard we can break even after 12 months at a per order profit of 20% which is $100 in profit per order. What are your thoughts? Is this a good model for your business?
3. Taking Action on Your New Information
Imagine once again that you are the owner of Sally’s promotional products company. You’ve run through the math and realized that it takes over a year to recoup your customer purchase cost. What does this mean to you?
- Can you afford to continue buying customers at an initial loss?
- Is customer retention high enough to do so?
- Is Sally equipped with the right tools and training right now?
- What would it take to double her new customer output?
- Are your products priced properly to achieve optimum profits?
- Is your advertising optimized well enough?
The first takeaway from a simple exercise like this is that customer retention is one of the most important areas to focus on as a team. You may not have immediate control of your sales and advertising costs, but you can teach your entire team the value of customer retention. Customer retention is so important to my team and I that we have a built-in exit interview for any customer that wants to stop using our services. This allows us to:
- Retain the customer over 50% of the time by solving the problem that was causing them to consider leaving
- Gain valuable insights from those people who do leave anyway
Double Your Results
The first thing I would do if I found out my customer purchase costs were this high, in relation to how long it takes to retain the customer, is to set a new goal. The goal would be to double the output from the sales team and the advertising dollars. If you can bring purchase costs down to $600 per customer you can start being profitable in year one, not year two!
Changing the standard in a drastic manner like this will cause a lot of discomfort and challenge your entire team, but think about the alternative. If you don’t improve results, your company may not survive, and those people who are complaining about your high standards won’t have a job. Kindly remind your team of the reality of the situation when you are faced with dramatic changes. We must change, or we will die as we are trampled by our competitors who do have the guts to change.
4. Protect Your Investment
Once you’ve taken steps to maximize your investment on the front side of the sale, what can you do to make that new customer even more valuable? I guess the first question is why do customers leave? While we can’t know all the answers to why customers leave, here are a few:
- They are dissatisfied
- They are wooed away by a competitor
- They choose to leave because you no longer appear as a market leader
Let’s go back to our story one more time. Sally’s boss has given her the tools to double her output, and she’s reached the new performance targets in less than 90 days. The advertising broker has improved the campaign, and his results have doubled as well. Now, what should they do?
In our fictional best case scenario they were able to immediately improve results, but what if it takes time to double the sales output? How else can you protect your investment and combat the three reasons that cause customers to leave?
There is a powerful and low-cost investment that you can make to solve all three problems. Are you ready for the answer? I think you are because you’ve worked hard and stayed with me to the end of this post, so here it is.
The answer to protecting your investment is content marketing.
Before you shake your head at me, stop and consider with me why you should be investing in consistent content marketing. What do I mean by content marketing? Content marketing is the blogging, email marketing, and social media posting that you do to both your prospects and our existing customers. Here’s why it works and why it works so well.
You Can Solve Complaints Faster
If you are continually sharing valuable information with your customer base and asking them to respond and reach out with any problems or concerns, you will be keeping an open dialog with your customers. If you constantly ask for feedback, you’ll find that those that do have feedback (both positive and negative) will talk to you. They’ll reply to emails, they’ll comment on blog posts, they’ll interact on your social media channels, and they’ll even pick up the phone and call you sometimes if you give them the chance! Keeping a positive and open line of communication between you and your customer is key to protecting your investment.
You Can Keep Them Away from Competitors by Remaining a Market Leader
The second valuable component of content marketing is that if you continue to provide valuable information to your audience it will really help them grow! As a result of that information sharing, they’ll continue to think of you as a market leader and an expert in your industry. Given the choice, people don’t want to choose an inferior product or company. If they can afford it, they’ll want to purchase the best option.
When you spend time investing in the constant education of your audience, you are protecting your position as a market leader. Sending your audience helpful tips, marketing research, and also insightful or inspirational material is a wonderful way to stay in touch and build the positive feeling they have about your company. Creating this brand experience is what will make your investment dollars work even harder.
When companies are spending $600 to $1200 to get one new customer, I am confident that it’s worth spending just a couple hundred dollars a month to protect their investment. Providing high-value content to all a business’ prospects and customers is a good protective investment, wouldn’t you agree?
When I realized that one of the simplest ways that a business could protect their customer acquisition investment was through effective content marketing, I created Copywriter Today. Our simple subscription content marketing service helps businesses all around the world to buy and retain customers at an affordable price. If you’re interested in giving our service a try for free, check it out here and enjoy a week of service at no cost. You can cancel at any time, and our service comes with a 100% money-back guarantee.
I hate ending the conversation here, because we have just started to scratch the surface of customer acquisition costs and why they should matter to you, but I’m out of time for today! I hope this has given you a new perspective on how to buy new customers and protect your investment. Remember that you need to run the numbers and find out what your costs are.
Is your current model sustainable?
Can you improve performance?
What can you do to protect your investment once that prospect does convert into a customer?
If you’re tired of spending tons of money upfront and not seeing the return you deserve over the long haul, take just five minutes and give Copywriter Today a try right now. You’ll be glad you did!
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