A key factor in any size business...

Not too long ago I put on a marketing seminar for several people looking to start a business in the county in which I reside.

One of the main questions I asked them was:

"How much do you need to spend on marketing?"

The puzzled looks stared me in the face so I rephrased the question:

"How much do you figure it will cost you in money/time to create one sale through your marketing efforts?"

Again...blank stares.

Unusual?

Not hardly. As one of my 'occupations' I work as a Business Specialist for my part of the state, which covers about 1,300 square miles and 2,000 businesses. I help businesses with marketing issues, operational issues and funding issues. And I will guarantee you the number of businesses out there (both new and established) that even have a rough idea of what it costs them to acquire one new customer is less than 5%. Possibly less than 1%.

From my point of view having been involved in numerous businesses over the last 15 years as an employee, owner or consultant, the cost to acquire one customer is the main determining factor IF and HOW successful (i.e. profitable) a business will be. But most businesses have no idea what it costs them to acquire a customer.

If you own a restaraunt and it's costing you $100 to bring in one new customer and that customer represents $50 in net profits over the course of your relationship then you'll be out of business...soon.

If you have an Internet related business and it takes 4 hours of work to acquire one new customer who represents $20 in net profits over the course of your relationship, is that making you money?

The trouble is if you don't have an idea of what your customer acquisitions costs are you are flying blind. And blind pilots eventually crash.

Again it doesn't matter what kind of business you're in...customer acquistion costs need to be known and understood in order for you to achieve maximum profit.

Do you think McDonalds knows what its customer acquisition costs are? How about Wal-Mart?

The way to make a small business into a large one is to find out what your customer acquisitions costs are in a small, testable and measurable area and if the acquisitions costs make sense, roll the program out into a larger arena.

That's why if size is important to you, you need to pick business opportunities that aren't limited geographically or by some other limiting factor like say the availability of merchandise.

In this forum we tend to talk about other things like motivation, which is much 'sexier' and perhaps more interesting than 'customer acquisition costs' it pales in comparison in overall business success (in my opinion).

What are your customer acquisition costs?

Take care,

Mike Winicki

Hi Mike,

There is a poster who visits this and other boards and he calls himself "a dumb o' dirt farmer" or something like that.

Well, I am "a dumb o' used automotive parts broker". I have been in business since 1989.
I broker used automotive parts both online and offline. (Primarily serving customers through out the states of Virginia, West Virginia, Kentucky, and Tennessee).

My question to you is: What steps can one take to determine....."How much one needs to spend on marketing?"

Warmest Regards,

Raymond

------------------------------------------

> Not too long ago I put on a marketing
> seminar for several people looking to start
> a business in the county in which I reside.

> One of the main questions I asked them was:

> "How much do you need to spend on
> marketing?"

> The puzzled looks stared me in the face so I
> rephrased the question:

> "How much do you figure it will cost
> you in money/time to create one sale through
> your marketing efforts?"

> Again...blank stares.

> Unusual?

> Not hardly. As one of my 'occupations' I
> work as a Business Specialist for my part of
> the state, which covers about 1,300 square
> miles and 2,000 businesses. I help
> businesses with marketing issues,
> operational issues and funding issues. And I
> will guarantee you the number of businesses
> out there (both new and established) that
> even have a rough idea of what it costs them
> to acquire one new customer is less than 5%.
> Possibly less than 1%.

> From my point of view having been involved
> in numerous businesses over the last 15
> years as an employee, owner or consultant,
> the cost to acquire one customer is the main
> determining factor IF and HOW successful
> (i.e. profitable) a business will be. But
> most businesses have no idea what it costs
> them to acquire a customer.

> If you own a restaraunt and it's costing you
> $100 to bring in one new customer and that
> customer represents $50 in net profits over
> the course of your relationship then you'll
> be out of business...soon.

> If you have an Internet related business and
> it takes 4 hours of work to acquire one new
> customer who represents $20 in net profits
> over the course of your relationship, is
> that making you money?

> The trouble is if you don't have an idea of
> what your customer acquisitions costs are
> you are flying blind. And blind pilots
> eventually crash.

> Again it doesn't matter what kind of
> business you're in...customer acquistion
> costs need to be known and understood in
> order for you to achieve maximum profit.

> Do you think McDonalds knows what its
> customer acquisition costs are? How about
> Wal-Mart?

> The way to make a small business into a
> large one is to find out what your customer
> acquisitions costs are in a small, testable
> and measurable area and if the acquisitions
> costs make sense, roll the program out into
> a larger arena.

> That's why if size is important to you, you
> need to pick business opportunities that
> aren't limited geographically or by some
> other limiting factor like say the
> availability of merchandise.

> In this forum we tend to talk about other
> things like motivation, which is much
> 'sexier' and perhaps more interesting than
> 'customer acquisition costs' it pales in
> comparison in overall business success (in
> my opinion).

> What are your customer acquisition costs?

> Take care,

> Mike Winicki

This is where the "lifetime value of a customer" idea comes in.

Basically, you estimate how much average profit an average customer represents over the typical course of doing business with you. For example, if you know that the average customer makes you $2000 profit over the course of your business with them, then you can count backwards to determine how much you should spend to acquire that customer. Anything less than $2000 will put you in profitable territory. So, if it costs $100 to acquire an average customer, then you can expect an average of $1500 profit from each customer. However, you must also consider time: if the average term of doing business with you is, say, 3 years, well, you would probably need a larger volume of customers to keep afloat.

Also, when thinking along these lines, its probably a good idea to leave a little margin for error, especially if you don't have a lot of data or if your data contains a lot of variance.

Hope that helps.

-Phil

P.S. - This line of thinking helps explain why cold calling, especially the high-probability prospecting way, is so effective. If you are cold calling a local area, each call costs less than ten cents -- much less than a postage stamp -- and then you only visit or send information to people who have stated that they want what you are offering. So you end up spending more on your most likely candidates and less on your least likely candidates (as it should be).

Hi Mike,

Excellent post!

I think knowing your costs to acquire a customer is the first step in a very "scientific" approach to marketing....

To find it out, though, means tracking ads and the results they bring, which is (unfortunately) too much hassle for most people.... However, it's important to do to succeed!

Certainly, the most successful online marketers I know of track their marketing. If they pay for an ad, they know exactly how many dollars that ad brings in, because they track the results....

The approach I know of usually goes like this....

* Calculate your profit per customer
* Calculate your conversion rate (that is, our of those who see your ads, how many of those end up buying?)

(You have to do some tracking first, to know the numbers from your business to make the above calculations....)

From the above figures, you know the profit-per-lead you make.

For example, let's say you make widgets, and the average customer spends $50 buying your widgets. Let's say 50% of that is profit, so you make $25 profit per customer.

Now, let's say you're running an ad, and on average you find that of those who receive that ad, 5% buy your widget.

That means your profit-per-lead in this case is 5% of $25, which is $1.25.

Knowing this, you know that in similar circumstances, if you want to double your money with each promotion, you can afford to pay up to $.62 per lead. That is, you know that if you spend $.62 per lead, you can expect to get around $1.25 per lead back.

Of course, there are other factors.... Not all leads are of the same quality, etc. But at least it gives you a starting point! If leads cost you more than $.62, then you know you need to look elsewhere for leads....

- Dien Rice


Get Yer Great Ideas Here! :)

> This is where the "lifetime value of a
> customer" idea comes in.

> Basically, you estimate how much average
> profit an average customer represents over
> the typical course of doing business with
> you. For example, if you know that the
> average customer makes you $2000 profit over
> the course of your business with them, then
> you can count backwards to determine how
> much you should spend to acquire that
> customer. Anything less than $2000 will put
> you in profitable territory. So, if it costs
> $100 to acquire an average customer, then
> you can expect an average of $1500 profit
> from each customer. However, you must also
> consider time: if the average term of doing
> business with you is, say, 3 years, well,
> you would probably need a larger volume of
> customers to keep afloat.

> Also, when thinking along these lines, its
> probably a good idea to leave a little
> margin for error, especially if you don't
> have a lot of data or if your data contains
> a lot of variance.

> Hope that helps.

> -Phil

> P.S. - This line of thinking helps explain
> why cold calling, especially the
> high-probability prospecting way, is so
> effective. If you are cold calling a local
> area, each call costs less than ten cents --
> much less than a postage stamp -- and then
> you only visit or send information to people
> who have stated that they want what you are
> offering. So you end up spending more on
> your most likely candidates and less on your
> least likely candidates (as it should be).

Obviously, the lifetime relationship between a vendor and a customer can vary from industry to industry. But a relatively consistent length of relationship is 3 years.

Once you've won that customer over, it's business suicide not to have another product (or two or ten) that you can sell them. Heck, the hard work is done by that point.

Take care,

Mike Winicki