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The costs of buying new customers

Home > Money With Melanie > Business Development

03 / Mar / 2008

MENTION MARKETING to the average business owner and they think mainly of advertising. However, there are far more cost effective, far more profitable and much easier ways to get new customers.

But first we need to understand a simple idea about what business really should be focused on, and that’s profitable customers. Let me explain.

When you ‘buy’ a new customer with any form of advertising or marketing it costs money. Simple example: if you ran an advertisement for say $2000 and got 100 calls and 20 sales then you spent $100 per new customer. That number is your ‘acquisition cost’ or ‘cost per sale’. Essentially, it’s how much it costs you to buy a new customer. Take that one step further and you got 100 people who called or 100 leads so your ‘cost per lead’ was ($2000/100) $20.
So, if you don’t already know these numbers you need to go and work them out. If you get a lot of business by word of mouth or passing traffic, you still have to count them as well.

Let’s follow this example and pretend it was a restaurant. What if the person coming in spent only $100 on dinner? How much money did you make from each customer? That’s right, you lost money, It cost you $100 to get them there, $30 for food and drinks to serve them, $30 for staff and $10 for overheads, so all up $170 out for $100 in.

In other words, all 20 of these new customers were, on average, losing you money.
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However, there are four ways we can turn them into a profitable customer right up front.

  1. We can work on writing better advertisements. Create a better headline, a better offer and make sure we only advertise in media that makes sure we are getting to our target audience. From there, we should be able to get a much better response. So, let’s look at the numbers if we doubled the responses, and you can fairly easily do this. Now we get 200 callers and your cost per lead goes down to just $10 each… That’s a great start and assuming the other numbers stay the same, we are down to just $50 cost per sale and thus $120 out for $100 in. Still more work to do, but we are on track.
  2. Next we work on getting more of the callers to come in and buy.
    Boosting your conversion rate is often as simple as measuring it and as complex as creating scripts for your salespeople or receptionists to follow. So, what if instead of one in every five (20 out of 100) coming in we could get two from five and really make sure the marketing and advertising dollar goes further. So, we are now getting 200 callers and instead of just one in five we get two in five people to come in and buy. That means we are up to 80 people booking in and buying from you. Your acquisition cost, or cost per sale, is now down massively. Your $2000 advert now gets you 80 buyers at just $25 each. So when we do the math, our marketing is starting to make a profit on every new customer, just $95 out for $100 in. Great work…
  3. Next, we need to get them spending more every time they buy from us. Instead of $100 each time, how can we work on raising sales, suggesting other items, a better wine list etc — all these ideas you can think about now and work on. What else can people buy?
  4. Finally, we need to get people back. Collect their details, send them a monthly newsletter, special offers, even a simple thank you card and invite them back as often as you can…

No matter what you do, remember you are buying customers and it’s getting more expensive every day. Once you’ve got them, keep them for as long as you can. Good service goes only so far; from there it’s up to you and your marketing to invite them back and give them reasons to buy from you again and again.

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