Does Your Business Know How Much it Costs to Get a New Customer?

Every year, thousands of people around the world start their own business. Some succeed, but a vast majority of them fail. Those that are successful know something that others don't: they know how much it costs to get a new customer. You could have the best service in the world, the most innovative product offering, the greatest potential for profit, but it won’t amount to anything if you can’t determine what your costs are of securing new customers. After all, who cares about the gross profit on the product, if finding a customer to buy the product costs more than the product itself, you lose. So, does your business know how much it costs to get a new customer?

1. Take all your marketing, advertising and public relations costs, and track their performance:   

I can’t even begin to describe the number of times I’ve come across a company who doesn’t properly track the results of their marketing initiatives. They have a marketing budget, institute the marketing plan, and wait. Now, they might get some results, some inquiries from both existing customers and new accounts, but as to how successful that individual marketing plan was, is always up for debate. These are the companies that rationalize the results and assume it was money well spent. Was it money well spent? Could they have spent less? What would have happened if they spent more? Would it have produced better results? Unfortunately, none of these questions can be answered because the company is not properly tracking the performance of its marketing plans. How difficult is it to track performance? Surprisingly, there’s an easy way to accomplish this goal; ask your customers. The next time your company secures a new customer, ask them how and why they contacted you. It’s that simple. Track your results over a period of one quarter or longer to give your efforts a chance to produce results. This example below is included in a sample marketing excel sheet at the bottom of this post.

  

This first portion summarizes the individual percentages of the company's marketing efforts. A total sum of 100% is broken down into mobile marketing plans, print advertisements, word of mouth etc. A pie-chart is then used to depict these percentages.


2. Take the costs of all your initiatives, and figure out the per unit cost of the new customers:

     

Do you know the cost of the most recent mobile marketing plan you ran? How many new prospects were received because of that plan? The answer to the first question is rather easy. You must know the cost of the mobile marketing plans or advertisements you’ve implemented. If you’ve successfully tracked the performance of your marketing initiatives (as described above), you can now do some simple math to determine the direct benefits of each initiative. More often than not, companies are pleasantly surprised with how much of their new leads come from various sources. Want to know if your company is doing a good job servicing your customers?Just look at the number of referrals you get from existing customers. Word of mouth advertising is considered among the least expensive ways to secure new customers and is a sure sign your company is on the right path. 

 
3. Now take the total spent by your “new” customers and determine the net benefit of these plans: 

  

So, you are now properly tracking the results of your leads. You know where they come from, and you know what their individual costs are in relation to the money you spent on that particular program. What’s next? Well, you now must determine the net benefit of your initiatives. You know what it costs to secure a customer, now you just have to determine what the total cost is when taking into consideration the profit you generated from any sales to those new customers. Most importantly, you must realize that not all of the new customers will actually move forward with buying anything. Therefore, let’s assume that of the 2500 customers, only 70% of them actually went through with any purchases. That means that 1750 new customers placed orders, and the gross profit generated from those sales was $15.00/unit. The total gross profit was $26,250.00, and after deducting the costs of the $10,000 on the marketing initiatives, your company had a net benefit of $16,250.00.   

 

Calculation: G.P. generated from new customers – cost of marketing initiatives

 

Now, I know this is a simple and straightforward approach, but this is meant to bring it down to a level everyone can appreciate. This is the essence behind the costs of finding customers. The analysis becomes far more complex when you break down the individual products that were ordered, and their corresponding gross profit. However, as a rule, this can be seen as a straightforward and systematic approach. As I progress in my blog, I’ll take this approach a step further an analyze returns from a marketing, and product/project management perspective.There are all kinds of ratios that need to be taken into consideration when it comes to your marketing initiatives. This is but one head start. Here is the excel sheet that this information came from: Download Marketingexample

Comments

[Jerrbone]

Thanks for the explanation. How would you track the ROI of a campaign based on marketing spend? IE should we be measuring that against hard or soft or both cost of a campaign?

[Visionquest]

Hi "Jerrbone",

I believe you are inquiring about how to measure a marketing plan with respect to a company's sales? Am I correct with this assumption?

If so, you might want to read "Marketing Budget Planning: Tracking Quarterly Performance" I have included the link here.

http://www.driveyoursuccess.com/2010/10/marketing-budget-planning-tracking-quarterly-performance.html

You probably have to cut and paste this into your browser, or search for it on the blog.

I believe this will adress your question about hard costs - measuring a marketing budget relative to sales and measuring performance and marketing ROI by quarter or by month.

If not, email me (there's a link under the pages section entitled "email me")

Take care
Visionquest