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Track And Measure Your Advertising, Customer Acquisition Costs, And The Lifetime Value Of A Customer

By Hunter Waterhouse in Featured

As business owners and managers, we need to look at a variety of numbers to gain a better understanding of our businesses. In this article, we are going to consider two very important metrics in business marketing – Cost Of Customer Acquisition and Advertising ROI (Return On Investment).

One of the most important numbers we need to always be mindful of is the “Cost of a New Customer” or “Cost of Customer Acquisition”.

Understanding Customer Acquisition Costs

If you are unfamiliar with this concept, let me give you a quick tutorial on this advertising metric.

Suppose you run an advertisement in your local newspaper for your furniture store. Suppose for the sake of this example that you paid $1000 for your display ad in the newspaper.

Now, suppose your advertising brought 4 new customers into your store, who bought from you. Suppose also that the average spend for each customer was $1500.

With the example I am drawing, your $1000 display advertisement in the newspaper brought in 4 customers who spent a total of $6000 in your store.

I am going to keep this example simple, so that more people can keep up with the numbers.

On the basic premise of our example, you generated 4 customers after an outlay of $1000 in advertising. So your basic Cost Of Customer Acquisition was $250 per customer.

If your business received fewer customers, from your outlay of $1000 in advertising, then your Cost Of Customer Acquisition is more expensive.

But, if your business earned more customers who spent money, then your Cost Of Customer Acquisition would be much smaller.

In its simplest form, the Cost Of Customer Acquisition is the money spent to get the customer to your store divided by the number of new customers acquired. We will look at this in more detail, later in this article.

The Best Way To Measure Sales And Marketing Performance

Entrepreneur Magazine in a 1999 article reflected on the Cost Of Customer Acquisition in the dot com world. The article suggested, “the cost of new customer acquisition is one of the best ways to measure sales and marketing performance.”

In 1999, the Cost Of Customer Acquisition for the following companies were:

• BarnesAndNoble.com – $42
• Amazon.com – $27.60
• Priceline – $32.30
• Beyond.com – $29.30

On the surface, these numbers may seem small. But, Amazon’s Average Sale is in the $17-range! This makes the challenge that Amazon and other major retailers face fairly transparent. If these retailers could only count on one purchase from the newly acquired customer, then these businesses would be losing money by the truckload.

Fortunately, Amazon continues to perform well in Repeat Business from a single customer. The following calculations reflect additional numbers that we business people should also factor into our Cost Of Acquisition metrics.

The Real Value Of A Customer

Amazon’s first-sale may only be $17, but in 1999, Amazon’s Average Sales Per Customer was $116, up $10 from the previous year. Unfortunately, Amazon isn’t very forthcoming with these numbers, so after two hours research, I was unable to come up with more up-to-date numbers for you to consider.

The point of mentioning this is that it is important for business owners and managers to recognize that the Value Of A Customer is not how much sales revenue is derived from the initial purchase, but more importantly, from the Lifetime Value Of A Customer.

If we looked at Amazon’s Cost Of Customer Acquisition only in terms of that first sale, then they will be losing money hand-over-fist. With a Cost Of Acquisition of $27.60 and the first sale of $17, Amazon could not stay in business long if they were continuously producing numbers at that level. However, once you factor in the Lifetime Value Of A Customer, then Amazon is spending $27.60 to acquire a customer that is worth $116 in sales for them. Therefore, by measuring the Lifetime Value of a Customer, Amazon is spending only 24% of their revenue in order to acquire one customer.

Few businesses invest 24% of their revenue in advertising, but Amazon hopes that the Lifetime Value of a Customer will eventually exceed the $116 value, known to have existed in FY2000.

As the Lifetime Value of a Customer increases, the overall Cost of Customer Acquisition will fall, as an overall percentage value of Cost Of Acquisition divided by the Lifetime Value of the customer.

The Compounding Lifetime Value Of A Customer

If you have a hair-cutting salon and your advertising budget for one month is $1000, and you get 30 new customers through the door, who will spend an average of $20 for a hair cut, then your basic Cost of Customer Acquisition is roughly $33.34 to gain $20 in new sales.

But if only half of your 30 new customers become regular clients, then you can anticipate 15 of those customers coming to your hair salon at least once a month for the remainder of the year. Therefore, the first 15 customers will be worth $20 each, and the next 15 customers will be worth $240 each over the course of one year ($20 x 12 months). All told, your first 15 customers will put $300 in your cash register, and the next 15 customers will put another $3600 in your cash register.

Thus, in the hair salon example, your $1000 in advertising could generate new customers that will generate $3900 in new sales. Once you start to consider the Lifetime Value of a Customer, within the Cost of Customer Acquisition, then you will realize that the Cost of Customer Acquisition – although it might be higher than the initial sale – holds out the possibility and promise reducing itself as the Lifetime Value of a Customer increases over time.

As the end of the year winds down, you will be able to see that a $1000 expenditure was turned into $3900 in new revenue. In essence, for every dollar you spent on advertising that month, your return value was $3.90 over the course of one year.

In the second year, if only half of the original 15 regular customers or roughly 8 people stay with you for the full course of the second year, then the $1920 in revenue (8 people X $20 each X 12 months) you can expect from those customers could almost be considered free money. Of course, you will still have service fulfillment costs, but that second year will give you nearly $2000 in revenue that you will not have to chase.

Even if half of the customers drop off during the following calendar years, then a 50% customer attrition rate will allow you to have customers that could stay with you up to five years. Calculated against a 50% decrease in customers over each calendar year, your $1000 investment in advertising may translate into $7500 in revenues over five years ($3900 + $1920 + $960 + $480 + $240 = $7500), from the initial investment of $1000 in advertising.

The interesting thing about this scenario is that it is based on an advertising budget of $1000 ONE TIME. But, most businesses will continue the advertising process every month in every year. Therefore, the above example could compound month-after-month. Every month should bring the same or similar results to your business for the month and year.

Advertising Is A Process, Not An Event

Many small business owners have a dire misunderstanding of the nature of advertising and the value to be received from the advertising.

When business owners or managers fail to track and measure the new business generated from the advertising, then the business owners and managers will fail to see that advertising is an expense that can return huge dividends to the business.

When businesses fail to track and measure advertising successes, people tend to only see the money leaving the business without every seeing the reward coming back into the business. As a result, many business managers will employ advertising for a short time, then cancel the advertising, under the false belief that the advertising was not returning value to the business.

When businesses fail to understand the Lifetime Value Of A Customer, it is hard to appreciate any advertising method that fails to pay for itself in its first cycle. If Amazon was to only look at the initial sale generated by a new customer, they would quickly cancel all of their advertising efforts. Fortunately for Amazon, its management understands that the initial $17 sale is not the measure to use to determine the value of Amazon’s advertising efforts. Amazon’s management understands that the true Cost of Customer Acquisition should not be measured by the initial sale, but by the Lifetime Value of a Customer. In doing so, Amazon has ensured that it will continue to be one of the largest and most successful retail outlets on the planet.

When business managers fail to understand the Lifetime Value of a Customer, it is hard for them to appreciate and understand the compounding nature of the revenue stream for a business. It is hard for them to understand that money invested into advertising today, can deliver huge rewards over the next several years.

A Wake Up Call For Small Business Owners

According to Scott Shane, author of “Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By“, only 29-in-100 businesses will remain in business after ten years. That means that a full 71% of businesses started in any calendar year will be out of business in only ten years.

It is sad to say, but the reason most businesses fail is that business owners and managers fail to understand the nature of advertising, the importance of tracking and measuring advertising results, the Lifetime Value of a Customer, and the compounding nature of the revenue stream.

I don’t want to see your business on the trash heap of yesteryear. So, it is my hope that you will take this article as a wake-up call, as to the importance of advertising and its potential to lift your business into profits.

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Hunter Waterhouse has been helping business owners advertise their businesses online for nearly a decade. He is ready, willing, and able to put his experience to work for Main Street Businesses that seek to generate walk-in traffic to their stores, from the online exposure of their business. To learn more about how Hunter can help advertise your local business, visit: http://onlinemarketinglocal.com/

How to Turn Casual Customers into Raving Fans

By Judy Murdoch in Featured

One piece of advice I’m hearing again and again is the importance of taking good care of your “core customers.” The customers who have been working with you for years, who send you referrals, and who return again and again to buy from you.

Loyal customers are vitally important during difficult economic times like we’re currently experiencing because they’re less expensive to sell to: you don’t have to spend weeks sometimes months building credibility because they’re already sold.

But what if your business is relatively new and you just don’t have many customers who are coming back yet? Or what if you just lost several of your business customers and you need to cultivate new relationships?

Can you do something to accelerate the process of turning casual customers into raving fans who sing your praises?

Article Marketing: A Great Strategy To Promote Your Business

By Enzo F. Cesario in Featured

Promotion is an important part of any business; you need to let potential customers know about you and your product. Article marketing is a strategy that will increase your exposure to the people who will want to buy your product or service. Articles written about your industry will help to establish you, the author, as an expert in your field, and can be published in print media and online.

Customers have a preference for doing business with someone they are familiar with, and article marketing is an ideal way of getting your name out there. The content of your articles needs to be useful and relevant to your target market. Articles that are informative, interesting and provide solutions to your readers are tremendously helpful.

If writing is your thing, then do your own articles. If not, there are several sites online where you can connect with writers, eager for work. Choose someone who uses good grammar and spelling skills, and who can write in an informal and conversational style that is easy to read. Your name will appear as the author on these outsourced articles, promoting you as the expert.

These articles are meant to inform and add value to you and your product; they are not blatant sales letters. Online publishing sites wouldn’t publish sales letters anyway, and print media would avoid them as well. To establish your credibility, you need to give something to your readers, not blast them with sales talk. Don’t ever forget, the reason they are reading your articles is for the information.

Web and ezine writing is very different than writing for other off-line publications. Brief is better. Be concise and write in short paragraphs. Your main purpose is to capture their attention and to get them to visit your website. If your article is long with every piece of information, they won’t see the value in clicking the link to your site.

You should always check for spelling and grammatical errors before submitting your articles to directories. These kinds of errors will reflect badly on your reputation and credibility as a quality information provider. Try to avoid technical language, but provide an explanation of terms if they need to be included.

Put the major benefit to the reader in your title. The title will determine whether or not the reader will click to read the article and possibly click to visit your site. If they aren’t compelled to read the article, they will never get to see your link, or see your website.

Article directories are the sites where you submit articles for online publication. They check your articles to make sure they comply with their guidelines before they publish them. And though we won’t go into it here, print media, like newspapers and magazines, are also always looking for fresh copy, so you can also submit your interesting articles to them for publication.

Make good use of the resource box under the article; this is where you can promote your product and supply contact information. What you include here should encourage readers to click to your website. The best resource box describes your website or yourself in a short sentence and includes at least one link that points back to your website or blog. When the reader clicks on the link to your site, your website visibility will increase.

Remember, a brilliant article with a bad resource box is a waste of time and money. Carefully review the rules for resource box information for each directory you submit to and try to get in as much information about yourself as you can.

If you can, place links to other articles you’ve written in a new article you’re writing. Sometimes, if the advice is helpful, the ezines will let you do this. This cross-referencing will get you more bang for your buck. Before publishing them elsewhere, you should always add your articles to your website or your newsletter. This helps to identify you as the source of the information and is another good way to get your name out there to build relationships with potential customers.

Articles for online publication need to be written with search engines in mind. You need to use the most popular keywords that online users type into their search engine when looking for information about your topic. Use the keywords in your article, but do not saturate it with them. This ruins the readability of the article and will not add to your credibility at all.

Set up a blog to keep in contact with customers and interested contacts. You can upload your articles to your blog to give your readers a continual supply of interesting, informative articles about your area of expertise. Add new content frequently to keep the search engines interested in your articles. Use your blog as another means of promoting your product and yourself as trustworthy and interested in your customers.

Article marketing is probably one of the easiest and most effective ways of driving targeted traffic to your website and boosting your exposure on the Internet. These guidelines will help you get started in article marketing. Use them to promote your product or service and to establish yourself as an expert in your field, then watch your sales increase.

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Enzo F. Cesario is a Copywriter and co-founder of Brandsplat, the only online marketing and advertising company employing Brandcasting, the most effective way to brand your company on the web. Brandcasting uses informative content and state-of-the-art internet distribution and optimization to build links and drive the right kind of traffic to your website. The approach is simple, highly effective and affordable. Learn more at: http://www.Brandsplat.com

Read more articles written by: Enzo F. Cesario

Growing Your Business with Online Marketing

By Enzo F. Cesario in Featured

As a business owner, you know that one of the keys to a successful year is promoting your business. No matter what size your business is, marketing and promotion need to be addressed. Marketing has become a daunting task with the increasing number of online start-up businesses.

And now, along with the traditional offline marketing methods, there are many online marketing tools and methods available.

Online Marketing is also known as Internet Advertising, web marketing, web advertising or e-marketing.

There are many benefits to marketing your business online. Here are a few.

Lowering Your Costs

A recent eMarketer article (http://www.emarketer.com/Article/aspx?R=1007064) sites that “in the wake of the global economic downturn, marketers worldwide are shifting more of their budgets into cheaper, more-measurable categories. In most cases, that means online.”

Your marketing budget is only so big and online marketing can stretch it even farther for you. TV and radio spots are expensive, printing costs for corporate and product brochures are expensive and traditional mailings cost not only in materials and postage, but deplete the environment as well. Why not direct potential customers to your website for information on products and services? Your website is your brochure, a marketing tool available 24 hours a day to prospective customers. Your revenue potential will increase while your costs diminish.

Offline marketing ads for newspapers, TV and radio are for a limited time and you pay for the time slot and space. In online marketing, your ads potentially can stay up longer and over time you end up paying less. Using article marketing, you could either write an article yourself or pay someone else to write it. When that article is distributed online, it stays on the Internet for many years. For a small cost, you’ve placed a marketing proposition that stays around indefinitely, pointing potential customers to your website and your products and services.

Compared to traditional marketing or telemarketing, email marketing costs very little. These targeted messages go directly into the homes and offices of your potential or existing customers.

Reaching a Larger Market and a Targeted Market

The Internet allows people from all over the world to do business with each other.

From another recent eMarketer article, (http://www.emarketer.com/Article.aspx?R=1006988) in 2009, more than 65% of Americans are Internet users. They’re not only checking e-mail and Twittering, they are shopping for products and services.

With traditional media, your ads are restricted to a specific location for a limited time. When you promote your business online, you reach a larger audience than you would ever be able to reach otherwise since your marketing activity is not restricted by location. More potential customers always equal more sales opportunities.

Online marketing allows you to target specific demographics such as age, location, gender and income levels and in many cases allows you to track the behaviors of these groups as they interact with your online marketing.

It can also bring a branding campaign to life in a new way. This unique consumer interaction with your brand can leverage emotional links to your brand. Instead of a brand talking to a customer, your customer can interact with and experience your brand. This is intelligent brand marketing. You can influence people at the perfect time – their time, right when they are looking for information, comparison shopping and possibly buying.

Flexibility and Tangible Tracking

Online marketing can include email, newsletters, blogs, microblogs, podcasts, video and social media sites. All of these outlets have the ability to be flexible. An ad placed in a magazine or newspaper can’t be changed until the next submission. With online marketing you’ll know very quickly if a campaign is working and you can change wording or graphics and adapt product information to match changing market conditions.

The Internet also removes any guesswork from measuring campaign results. Using web analytics, you can measure the number of visitors that a campaign brings to your website, how long they stay and the average number of pages they visit. This important information along with the flexibility, allows you to improve the conversion of your campaign and to increase your return on investment.

Instant Conversion Ability

Online marketing allows you to convert a shopper to a customer instantly. A potential customer reading a traditional newspaper ad does not have the ability to click a mouse and buy your product or service immediately. Offline marketing involves more time and money to convert a shopper into a sale.

Online ads allow direct response. Consumers can click to learn more about a product, sign up for a newsletter or RSS feed, or buy right then and there. This will in turn create a database for you, which, with email marketing, will allow you to reach people who have already expressed an interest in your product or service. And online marketing allows you to sell to anyone, anywhere and at any time. You’re not restricted by time, geography and location considerations.

Internet marketing includes strategies such as search engine optimization (SEO), pay per click marketing (PPC), article marketing, blog marketing, online brandcasting, social media marketing and many more interactive marketing services.

While these strategies may seem daunting at first, with a little research, you can use some of these tools to help you optimize your website and increase web traffic. Or, if you have it in your budget, there are companies that specialize in many SEO services.

There are many benefits to both online and offline marketing. A mix of the two might be just what your business needs to grow.

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Enzo F. Cesario is a Copywriter and co-founder of Brandsplat, the only online marketing and advertising company employing Brandcasting, the most effective way to brand your company on the web. Brandcasting uses informative content and state-of-the-art internet distribution and optimization to build links and drive the right kind of traffic to your website. The approach is simple, highly effective and affordable. Learn more at: http://www.Brandsplat.com/

© Copyright 2012 All rights reserved. Jayde Online, Inc.

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