One of my customers recently asked that I help them better define their customer acquisition costs. In this case, they wanted to know how to compare the results from three separate marketing campaigns. First, we started by defining what a qualified lead meant to the company. The second step included deciding how best to reach these qualified leads. The third determined the number of qualified leads emerging from each plan. The fourth determined the cost of each lead. The fifth included determining the number of actual customers and the rest involved determining conversion rates and total sales.
Granted, it sounds like a lot of work. however, it is worth the effort and it is pretty straightforward. So, here are some simple steps for small businesses looking to determine how much it costs to get new customers.
Step 1: What is a Qualified Lead?
What does a qualified lead look like to your enterprise? Answering this question starts by defining your business model. For instance, if your company serves a B2B (business to business) market, then a qualified lead will be determined by factors including, but not exclusive to: the customer’s size, their geographical location, their financial stability, their market niche, their product & service offering, their growth rate, their market position & reputation, and or any other strategic benefit the company can quantify.
In terms of a B2C (business to consumer) market, that qualified lead may come from a customer segment that is distinguished by its age, demographic, sex, ethnicity, marital status, living arrangement, generational distinction, and or any other identifiable attribute for that given target audience.
Determining your qualified lead is the single most important step of calculating your costs to find new customers. After all, these qualified leads are essentially “qualified” to make a purchase; put differently, they are qualified because they happen to represent your company’s greatest chance at closing business.
Step 2: How Do We Reach These Leads?
For whatever reason, a number of companies struggle with this second step. They just can’t seem to dial into how best to reach their target audience. Now, by no means am I implying that it’s easy – because it isn’t. However, this second step improves with each iteration. In essence, the best way to reach your target audience is to continually adjust your marketing campaigns. Granted, to get started often includes taking a shot in the dark. Regardless of this, it’s a decision based on factual assertions – not guesses. When you’ve defined what constitutes your ideal qualified lead, then deciding how best to reach them should be based on what you know, not what you don’t.
For instance, one of the more aggressive ways to reach a B2B audience is to attend trade shows, conferences and exhibits. Consequently, reaching a B2C audience online often involves building a website’s PageRank and online reputation by using social media, PPC (pay-per-click) campaigns, mobile marketing and email campaigns, among others. Focus on where these customers congregate and go out and get them!
Step 3: Determine How Many Leads Come From Each Plan
Don’t complicate this third step. It’s much easier than you think. Tracking where your leads come from in terms of online marketing is fairly straightforward. It’s those outbound strategies that are often difficult. If unsure, just ask your customer how they came to hear about your company. Most of your lead tracking will be easy, but for those instances, just ask.
The five marketing strategies defined in the above email are from: 5 Simple Approaches to Maximize Small Marketing Budgets
Step 4: Determine Cost of Leads From Each Campaign
This is easy. Take the amount spent on the campaign and divide it by the number of qualified leads that plan generated. This information should come directly from your marketing budget.
Step 5: Determine Number of Actual Customers
This is a step most companies simply ignore. Often it's because they don't understand its importance. Regardless, it doesn’t matter how many qualified leads are generated; if your sales team can’t close any of these leads, then you’ve simply wasted money. Finding qualified leads is one thing, but tracking the number of customers that emerge from those leads is essential.
Step 6: Conversion Rates, Sales Cycle Times and Sales Totals
You must determine your conversion rates on each of these marketing campaigns, otherwise known as “sales closing rates” in the table above. This simply involves taking the number of new customers and dividing it by the number of qualified leads generated by that plan.
The sales cycle times are simply the times it takes your sales team to close business. Some plans will immediately produce sales, while others will tend to take longer to close. Sometimes it’s inherent in the program itself, and other times it’s merely the way that message is structured.
It's also important to take the time to determine the amount of these sales. Bottom line, you should track these results by month or by quarter. A good rule of thumb is to perform the analysis so that it coincides with the longest sales cycle time emerging from the marketing plans. In our example above, that happens to be the first campaign listed, the “direct mail campaign” and its average sales cycle time of 1.5 months.
Now, looking at that table, it becomes fairly obvious the dangers of simply going by the cost of lead generation. For instance, the direct mail campaign has the lowest overall cost of lead at just $12.00. However, while both the SMS and Email campaigns are more expensive in terms of their “cost of leads” they both have higher conversion rates, shorter sales cycle times, and higher average sales for each customer purchase. Again, it takes time to analyze the effects of these campaigns and determine the company’s costs of customer acquisition. The net benefit of the Email campaign is $65.00 for each new customer the company brings in via this strategy ($85.00 average sale - $20.00 cost for each lead). However, companies tend to place a difference emphasis on this cost and instead, prefer to track these benefits over time.
When looking at your costs of customer acquisition, don’t just stop at the "cost of lead" step. Your marketing campaigns could produce hundreds of qualified leads – what’s important is the number of sales that come as a result.
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