Calculate the Cost of Customer Acquisition

Posted by on February 7, 2011

A Brief Examination Into the Health of Your Marketing

STEP 1: What percentage of your sales volume comes from repeat or referral customers? These customers are driven to you by past satisfaction.

Don’t read any further until you’ve decided on a percentage. Give it your best guess.

STEP 2: What percentage of your sales volume is triggered by your location and its exterior signage? These customers come to you because of your visibility.

Again, write down a percentage, your best guess.

STEP 3: Add those two percentages together, then deduct from 100.

The remaining percentage is your “advertising driven” traffic, new customers who come to you solely because of your ads.

I’m betting this percentage is a lot lower than you would have guessed. Am I right?

STEP 4: How many unique customers have you served in the past 12 months? Write down a specific number. You’ll probably need to consult your records.

STEP 5: Apply your “ad-driven traffic” percentage to the total number of unique customers you’ve sold in the past 12 months. This will tell you exactly how many new customers you’ve served in the past 12 months who came to you solely because of your advertising. [
If your ad-driven traffic was 20 percent and your Unique Customer Count was 5,000, then you had 1,000 ad-driven customers.]

STEP 6: Divide that number into your annual ad budget.

The result of that division – the quotient – is your Cost of Customer Acquisition. It’s how much you’re spending on advertising to bring one new customer through your doors.  (You may notice that our equation didn’t calculate the cost of referral customers. This is because referral customers don’t come at a direct cost, as do ad-driven customers, but at the indirect costs of customer service and relationship management.)

STEP 7: Write your Cost of Customer Acquisition – the number of dollars you’re paying to bring one new customer into your business – LARGE on a sheet of paper, or put it on your computer screen in a 72-point font.

Stare at it for a moment.

Here are the obvious questions:

1. With the cost of new customer acquisition so high, why advertise at all?

2. How can we drive this Cost of Customer Acquisition way, way down?

Let’s answer the first question first:

If a prospective customer doesn’t give you a chance to sell them, there can only be two possible reasons:

A: They haven’t heard about you. (This problem can be solved by advertising.)

B: They have heard about you and they don’t like what they’ve heard. These customers – based on information given to them by others – have made the decision not to do business with you. A good ad will give them new information that may lead them to a new decision. You may also need to invest more energy in customer service and relationship management.

“With the cost of new customer acquisition so high, why advertise at all?

The primary goal of advertising is to acquire new customers. Your future repeat and referral business depends on it. Good customers move to other towns, or die, and you never see them again. It happens to every business and it happens every year.

Additionally, new people move into your town and have no idea where to shop. Approximately 20 percent of the average American community didn’t live there 1 year ago. How are you reaching out to these newbies? Are you crossing your fingers and hoping they’ll meet one of your loyal customers? Are you counting on the newbies noticing your sign, or perhaps finding you online? These things can happen, to be sure, but is this your growth plan for 2011?

“Okay, so we have to advertise, but how can we drive the Cost of Customer Acquisition way, way down?”

First, let me say that it can absolutely be done. We can drive that cost down, I guarantee it. But I’m going to save the details until you arrive at Wizard Academy. (Yes, I know that makes me a total rat bastard, but you’ve been meaning to make a trip down here anyway, right?)

Customer Acquisition Workshop – Monday, March 14
Each registrant will leave with a customized plan to attract new customers. You will learn a little, work a lot, guided every step of the way. Register early and save the cost of a hotel room. The first 14 to sign up will enjoy 1 day/2nights at no charge in exciting Engelbrecht House, Wizard Academy’s amazing student mansion. Additionally, although this 1-day class is only $750, it will qualify you as an Acadgrad and you’ll save 50 percent on all future classes. (Acadgrads, this class is just $375 for you.) Arrive Sunday afternoon, spend the night in Austin, work like a dog all day Monday, relax in Austin that night, then return home Tuesday the 15th with an incredible new plan for customer acquisition.

Well, what are you waiting for?

Roy H. Williams

An even more startling event
will be the 2-day/3 night Eisenberg/Sexton Web Copy Workshop happening March 30-31. Take a look at what Wizard Academy’s web copy geniuses have planned for you. Wow. Remember, Eisenberg has written 2 books about online marketing that were both New York Times bestsellers and he often asks Sexton for advice.

Feb 22-23, make better face-to-face presentations. We’ve saved you a free room in Engelbrecht House so you won’t have to rent a hotel or pay for meals. What a deal! Join Steve Rae and me for Public Speaking 101, a longtime favorite class of Acadgrads worldwide.

PS – Today’s exercise was based on your best guesses at the percentages of your sales volume that were:

1: repeat or referral customers,
2: location-driven customers, and
3: advertising-driven customers.

If you would like to begin measuring these things accurately, here’s how it can be done.

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