Digital Strategy

How Much Does a Customer Cost?

April 2018
Che Stevenson

Maybe a better way to say it is: how much does YOUR customer cost? Have you ever asked yourself this question? The answer... your answer has the potential to transform your business.

The boffins call it Cost Per Acquisition (CPA) but I prefer to call it simply cost per customer. Put it another way: Do you know how much it costs to 'buy' a customer with your marketing efforts?

It's a powerfully simple way of thinking about your marketing: how much am I willing to spend to buy a customer? How many customers do I want? If you can answer these questions the sky is the limit.

The problem is that traditionally cost per customer has been notoriously difficult to measure. It would often boil down to simply: how much did we spend on marketing this year divided by the number of new customers acquired (bought).

But in 2017 we don't have to throw up our hands and say 'oh well, all's well that ends well' – stuff that! With the right digital marketing strategy, the right measures, and regular reporting you can directly measure and optimise your cost per customer.

Don't Believe Me? Here's an Example...

It all starts with a customer. One customer. Your customer might be buying one low cost item, many high cost items, or anything inbetween: the amount you are willing to spend on buying a customer will vary greatly depending on the ultimate value of the customer.

In this example we need to send the customer a quote before they purchase and 25% of quotes convert to orders/customers. So to get one customer we need 4 quotes.

You may or may not quote your customers, it doesn't really matter, the point is that we look at the step before becoming a customer and work out the conversion rate to customer. In this case it is a quote, and we've used a very common quote conversion rate.

This example is a business-to-business product where we have a sales team works with leads to move them through to quote and order. For this business 50% of leads progress to quote, meaning we need 8 leads to get 4 quotes to get 1 customer.

From my experience 50% lead to quote rate is not uncommon, but this does vary quite considerably from business to business. For example if your quotes are very time-consuming to produce, you might be very selective about quoting and have a much lower conversion rate. Builders are an example of this.

Again, leads and quotes are the stages for this business (and many businesses in the B2B space), but your process may vary.

This example generates their leads through their website and they have a good website with strong lead generation features. They are achieving a 5% conversion rate from visitor to lead, which means they need to attain 160 website visitors to get those 8 leads.

Believe it or not 5% is actually a pretty high lead conversion rate. In business-to-business markets the rule-of-thumb is 3-5%, in business to consumer you can expect to achieve around 1%. Anything above 5% is practically unheard of (though I do have one customer who is achieving close to 10%!).

In reality most businesses haven't put much effort into website-based lead generation and will be achieving maybe half of the benchmarks. The impact that visitor to lead conversion rate has on the profitability of your marketing efforts is immense.

8000 views! Say what? Bear with me, it will all make sense...

This example is using a long-running and well refined Facebook advertising campaign and they are achieving a 2% response rate on their advertising, meaning they need 8000 views to get 160 visitors.

Statistically the response rate is more likely to be 0.5-1% but it is not unheard of to refine and optimise your campaign to achieve greater response rates. Besides, it would have been a massive pain in the neck to add another 8000 dots in this image!

The takeaway here is that a huge amount of effort goes into attracting your visitors, it had better be worth it to your business once they arrive.

The current Australian average cost per 1000 impressions (CPM) in Facebook advertising is $6. Its possible to achieve a lower CPM, but for this example we're using the average.

Facebook is actually a very low-cost advertising channel. For comparison, a full page ad in the Saturday edition of a particular regional Newspaper will cost you around $5,000 for an estimated readership of 48,000 – or $104 CPM. That's 17 times the cost of Facebook advertising! The comparison doesn't stop there: Facebook advertising allows you to hone in on a defined target audience and is directly actionable – you can't control who reads the paper and you can't click on a newspaper ad!

Why the heck aren't you using Facebook advertising?

So the final answer to this question is $48 – eight times $6 CPM in Facebook advertising. This example has done the work to prepare themselves to capitalise on the potential of online advertising: they've got a well-refined online lead funnel and an effective sales process.

Same Principles, Results Will Differ

The stages of your sales process will vary, your conversion rates will vary, your promotional channels will vary, and as a result your ultimate answer will be unique to your business. But I hope I have inspired you to think about cost per customer and how this approach to thinking about your marketing can be extremely valuable.

Taking this a step further, I'd encourage you to consider setting up your channels and measures so that you can measure the cost per customer for each channel. Once you know this you will probably find that some of your marketing channels are doing most of the work while others are just riding on the coat-tails of your heavy lifters.

Once you know cost per customer and refine your campaign to the point that your cost per customer is adequately profitable, then you can simply say "How many customers do I want?". Multiply this by your cost per customer and you know how much to spend to get that.

This exact logic lead one of our customers to increase their Google AdWords spend from $600 to $2,000 per month and now they have a steady stream of around 70 sales leads per month – giving them the exact number of customers they want.

How awesome is that?

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