Measuring ROI: Customer Acquisition Cost

What is a new customer worth to your business?

Do you know what it costs you to acquire a new customer? If you said no, how do you expect to measure the return on your advertising dollars?

If you are serious about growing your business, you need to start tracking your ad response rates.

This will enable you to judge which advertising dollars are being well spent and which part of your advertising budget you are just pissing away.

It’s all about generating leads for your business and turning them into paying customers. The only way you can figure out your cost per lead is by tracking your ad response rates. Then to get your customer acquisition cost, you figure out how many of those leads closed or turned into a sale.

Here’s an example:

Let’s say we spend $300 on an advertisement and we get 15 responses that we track and know are from this specific ad.

Ad spend ($300) divided by the number of responses (15) = Lead cost, CPL or cost per lead ($20)

$300 / 15 = $20 cost per lead

Your close rate or how well you convert these lead to sales is what matters now. For this example, let’s say we made 8 sales from the 15 leads we tracked at $20 each. 8 sales from 15 leads is a close rate of better than 50%. This could be a pretty good percentage depending on what you are selling.

The ad spend ($300) divided by the number of sales (8) = ($37.50) Customer acquisition cost or cost per sale, CPS

$300 spend / 8 sales = cost $37.50 per sale

Now to figure out if this campaign was profitable, we would need to know how much profit we made on these 8 sales and minus the ad spend of $300. If the total profit on the 8 sales we made from this ad is more than $300, we made money on this ad campaign.

Tracking advertising response rates

Online

These days, tracking your online ad response rate is easy using Google Adwords or Google Analytics or both. In Google Analytics, you can use Goals to track your online response rates. This can also tie in with your Google Adwords campaigns to measure your customer acquisition cost or cost per lead.

Tracking phone calls from your website or online advertising efforts can also be done by using special web only phone numbers.

Offline

Tracking your offline advertising dollars is a bit more involved. For most traditional advertising channels like print, TV or radio you will need to use phone tracking or ad specific online landing pages.

Phone Tracking

Your offline ads will need to each have a different phone number with call tracking to measure the response rate from each ad you run. Now I know this sounds expensive, but today it is actually cheap to do. You can get local exchange or 800 numbers with basic call tracking and reporting for about $7 per month each and pay only pennies per minute for usage.

You also don’t have to use a different number every time you run an ad. For a newspaper ad, you can expect that the response will only last a few days to a week after the ad is run. This means that you can use the same trackable phone number for ads you run a week apart in different newspapers without being concerned with too much overlap.

With phone tracking your customer acquisition or lead cost is simple to figure out. If you spend $200 on an advertisement and get 10 calls, your lead cost is $20 each.

Ad Specific Landing Pages

You can also use online methods to track offline ads as well. Who hasn’t seen a TV or print ad with a website tracking code? A website tracking code is usually something like: website.com/TV20 or website.com/SPECIAL. This is just a landing page specific to that advertisement where response rate can be tracked via unique visits to that page. Ideally you want to use a unique landing page and website URL or tracking code for each ad you run.

Conclusion

Traditional advertising providers do not want you to know your response rate. They will tell you about their demographics, distribution, reach etc…, but only you can measure the actual performance of the advertisement.

Knowing your response rate gives you leverage. When the advertising salesman comes around to get you to renew your ads, you will have response rate data specific to that advertisement and you can use that data to negotiate your next ad buy. If you run an ad and find that the response rate is less than ideal for the money you spent, just tell the salesman you will not pay the same rate because the ad is not performing well enough to justify the spend.

If the response rate on that ad campaign is terrible, tell them you want a discounted rate to continue or just tell them to forget it and you’ll shift your ad dollars elsewhere.

Once you know how your ads are performing, you are in the driver’s seat.

By tracking your advertising performance, you will be able to trim your ad budget and increase your effectiveness.

Comments

Measuring ROI: Customer Acquisition Cost — 3 Comments

  1. Good article. I’m going through this exercise right now trying to set this up in our CRM. The CPL makes lots of sense and I’m able to do this. I’ll be able to set up specific phone numbers for offline ads. However, when figuring out the cost per sale for offline sales (lead comes in and spending time is required over a couple phone calls, demos, emails in order to convert the lead), your calculations do not take into account the salary, commission, overhead required to convert that lead). What is a practical way to track this for each leadsource or campaign? I assume that each ad/campaign will bring in leads that require different closing times depending on the demographic it’s reaching and the medium. E.g Conversion time from leads gathered at a presentation will be different from those gathered from a newspaper ad.

    Thoughts? Advice?

  2. Agreed, some leads will require more effort to nurture and close. I didn’t get into that in the article because I just covered the basics, but I see where you are coming from. I also understand that depending on what types of leads you are chasing and the sources they are coming from will make a difference in the overall lead cost due to time and effort spent in the process.

    …your calculations do not take into account the salary, commission, overhead required to convert that lead). What is a practical way to track this for each leadsource or campaign?

    You would have to average those closing costs (time, salary, effort, etc…) to be able to calculate the ROI more accurately depending on the type of lead and what kind of care and feeding it requires to close. You will probably find that leads from certain sources or that different types of leads will not require as much effort as others.

    Once you establish an average “closing cost” for each type of lead (phone, web inquiry, presentations, offline ads, etc…) apart from the ad spend, you should be able to tweak you calculations for each lead type to get a more accurate figure for the “actual” CPL on each lead type.