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    HOW MUCH ARE YOU WILLING TO PAY FOR A NEW CUSTOMER?

    Wouldn’t it be great if you never had to advertise or market to get new customers? Things would be so much easier if you could just go down to the local Customer Store and buy as many customers as you need.

    Before you buy anything for your company, chances are pretty good you take time to figure out exactly how much you’ll need and what you’re willing to pay. You evaluate and negotiate every purchase based on a standard unit cost, whether it’s light bulbs by the dozen or slabs of concrete by the ton, so you can monitor price fluctuations and determine how that expense impacts your bottom line profit. 

    Business owners know their company’s numbers by heart. Gross profit margins, average sales tickets, weekly customer counts and cost of goods sold come rolling off their tongues as quickly as requested. But when it comes to marketing, very few know the most important number of all: their CPC or Cost per Customer.

    No other company expenditure is made and monitored as haphazardly as the money spent on marketing. Businesses of all sizes have spent decades trying to answer the question, “is my marketing working?” They monitor and evaluate ratings, demographics, gross impressions and cost per inch, but none of those measurements relate to operating a business; only to buying media. Since marketing is nothing more than the process of buying new customers, shouldn’t every business know the cost of acquiring a new customer?

    Converting your marketing expenses into a CPC is pretty easy, once you plug in eight variables you almost certainly know about your business by heart, or can calculate in just a few minutes.

    Gross Revenue. There’s a no-brainer. An annual number will do just fine.

    Marketing as a Percentage of Gross Revenue. Every industry calculates an ideal target percentage of sales that should be devoted to marketing. Use that number, or take a look at your actual marketing expenses each of the last three years as a percentage of your gross revenue. The three-year average will work fine.

    Average Transaction Price. How much does the average customer spend each time they come in to buy something? If your computer system keeps track of total transactions, just divide that annual number into your gross revenue and you’ll have an average transaction price. If you keep more sophisticated data, you can analyze the average transaction fees for different product lines or profit centers. If you don’t keep track at all, make an educated guess.

    Number of Repeat Customer Transactions per Year.  Once a new customer buys something, how often do they come back? Again, your computer system may keep track of this item. If not, just think for a moment about the items you sell most often. Look at inventory and reordering histories to make a good estimate.

    Years a Customer. On average, how long do you keep someone as a customer? If your computer system keeps track of the first time a customer is entered into the system, you could calculate the number of years by taking an average of all the start dates.

    Added Sales. After the initial purchase, what other items do customers buy? If you sell furnaces, you may also wind up selling a filter, an air cleaner and a service contract to the same person. Add those extra dollars into the pot.

    Referrals. Local business owners always sing the praises of word-of-mouth as the best advertising, but most fail to measure the financial impact of those referrals. How often do your good customers make personal recommendations to their friends and co-workers about your business?  We’ll add that number into the revenue column.

    Customers Lost. Every business loses a certain percentage of customers every year. If you sell a high ticket, low repeat item like replacement windows, you probably have to replace nearly 100 percent of your customers each year, while a grocery store’s traffic is built almost entirely out of repeat business. Knowing the percentage of customers who won’t be coming back and your CPC, allow you to identify exactly how many replacement customers you’ll need to find in the coming year.

    Revenue Growth. How much are you planning to increase sales next year?  If you express that percentage as a number and divide it by your CPC, you’ll know how many new customers you have to “purchase” in the coming year.

    When you fill out the spreadsheet, you’ll see a whole new way to look at your marketing and advertising. Instead of judging how expensive (or inexpensive) your ads may be, you’ll be looking at which marketing plans meet your target CPC and how many potential customers you expect them to deliver.

    Expensive marketing isn’t about the cost of the ad; it’s about the cost to acquire the customer. Your target CPC gives you a benchmark by which you can evaluate any potential marketing program and keep total control of your budget. If your marketing is reaching the right target prospect and is repeated enough times for that person to comprehend your message and take action, you’ll never have to worry about whether your advertising is “working.”