January 30, 2014

Calculating How Much Each New Customer Costs You

new_customer_aquisition_costsAcquiring new customers is always a wonderful feeling – you’re building a tribe of people (or retailers) who like your products and that’s fantastic!  But have you taken into account how much it cost you to acquire those new customers?

The rough (and scary) rule of thumb in marketing is that it actually costs you 5 – 7x more to acquire a new customer than it does for you to retain an existing customer.

New Customers:

Depending on your business this can be harder to measure but what you’re looking for is new customers and not returning customers (we love those folks too and will talk about them more next week).  Try asking customers when they purchase from you, either via an online questionnaire or when you sell them the product directly, if this is the first time they’ve purchased from you (this is also a great place to ask how they heard about you so that you can focus more of your marketing efforts in that area).  Of course, if you have a database of prior sales this can be easier to filter through and determine who is a new customer and who is a returning customer but at things like farmers’ markets or other in-person retail events if you don’t recognize the person as a prior customer ask them if they’ve tried your product before and keep track of how many new customers purchased from you.

Ideally you will want to capture how many new customers buy from you during a specific timeframe such as a month or a quarter.

Marketing Spend:

The other part of the equation you need to consider is to know how much money you’re spending on marketing to acquire these customers.  Using that same timeframe you’re using to measure new customers, add up all your marketing costs for that period.  Be sure to include any website or hosting costs you might incur, any advertising you run, as well as the cost of any promotions you activated during that time.

New Customer Acquisition Cost Calculation:

To determine how much it’s costing you to acquire each new customer you need to take the total dollar amount in marketing spend and divide that by the new customers you received.  Let’s take a look at an example:

Website Hosting Costs for Month X: $5

Advertising Costs for Month X: $31 (pay-per-click ads)

Social Media Marketing Costs for Month X: $0 (doesn’t include cost of your time to implement, just the hard cash outlays. Do include social media advertising costs if you had any)

Promotion Costs for Month X: You ran a promotion this month that gave 5% off your $10 product and since you sold 8 of these to new customers then your promotion costs this month were $4.

Total Marketing Spend: $35

New Customers in Month X: 8

Customer Acquisition Cost = Total Marketing Spend / New Customers

$4.37 = $35/8

So in this example it’s costing you $4.37 to acquire each new customer.

Why Customer Acquisition Costs Matter:

So now that you know this figure why should you care?  You want to make sure that your costs to acquire new customers aren’t out of whack with what you can a) afford or b) can expect to make from the customer over their lifetime of being a customer.  If you sell a product for $2.00 then a $4.27 customer acquisition cost means you’re going to have to sell to them three times before you can break even on that cost.  If you’re not confident that will happen, you might need to rethink your marketing strategy to see if there are ways to lower those acquisition costs or increase the customer lifetime value.  On the flip side, if your customers average order size is $40 then the cost to acquire each customer is a significantly lower percentage of your gross profit.

This isn’t the end of the fun when it comes to measuring customer behavior against your marketing spend.  Now that you know how much it costs you to acquire each new customer you should compare it to how much it costs you to keep existing customers.  We’ll take a look at that next week!

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2 comments on “Calculating How Much Each New Customer Costs You

  • Colleen @ Royal Icing Diaries on said:

    What a fantastic post. Although I hate to admit it, I wouldn’t have even thought to look at things from this point. I always think I “don’t spend much” on marketing and all, but when I look at it like this, I realize that I do! Thank you for sharing this.

    • Jennifer on said:

      Trust me, it’s something a lot of us forget to look at (myself included)! But understanding that acquiring new customers does cost us money, it can help us focus our money and our efforts on acquiring the right type of customer who will (hopefully) stick with us for a while.