The $50 Santa: A Customer Acquisition Cost Primer
How much should acquiring a customer cost you? A campaign checklist to prevent spending more than you'll make.
Recently, I received a FedEx envelope from a company I’d never heard of. Like most people, I usually throw unsolicited mail in the trash, but this one made me curious. Opening it, I was stunned to find a $50 bill.
It turned out the package had been sent by a management training company based near Seattle, WA. It had included the $50 as an incentive to get people to call a salesperson.
Is this a good idea? To answer that question, analysts typically look at customer acquisition cost. It allows us to compare the campaign’s investment with its probable return. As a result, we can determine whether a particular initiative, such as handing out $50 bills, makes sense.
Acquisition Cost Analysis
As a digital marketer, you should care and know the acquisition cost for your campaigns and know the maximum you can invest to still yield a positive ROI (define). This offline example can be simply applied to online behaviors and analysis.
To see how this works, let’s take a close look at our generous training company. The first thing I noticed about the campaign was that the services offered were geographically restricted to the Seattle area. The company’s probable audience was about 1,000 people, a typical number for this kind of campaign.
Next, I looked at its potential profit. Its service costs $5,000 to $10,000, with an average return of about $7,500. Corporate training companies typically have a 20 percent net profit margin. As a result, I could assume each deal was worth $1,500 in bottom line profit.
Then, I looked at campaign costs:
- FedEx: $10 x 1,000 = $10,000
- Printing: $2 x 1,000 = $2,000
- Incentive: $50 x 1,000 = $50,000
In addition, creative and project management costs would typically run about $5,000, assuming it didn’t hire an outside vendor. This brings the total cost estimate to $67,000, or $67 per piece.
Net Return Analysis
Next, I figured out how many customers would need to purchase the service for the company to generate a positive ROI. This was relatively easy to do. Each customer is worth $1,500, so the campaign would have to convert 45 of them to top $67,000.
That’s a 4.5 percent sales conversion. That number may not seem like a lot, but it’s an unrealistic expectation.
Remember how close I came to throwing this advertisement (and its $50 bill) in the trash? That’s what most people do. Typical response rates to direct mail campaigns hover in the single digits.
But for the purpose of argument, let’s say the campaign scored a relatively high response rate of 5 percent. That’s 50 executives. Of those 50 who took the follow-up call, let’s say a very generous 20 percent were willing to take a meeting. That’s 10 people. And of those 10, let’s say another generous 20 percent converted to a sale. That gives us two sales, or $3,000.
Investing $67,000 to lose $64,000 is the kind of mistake that leads to job insecurity, if not worse. Unfortunately, many organizations fail to do the simple math exercise above and end up in the same position I predict my $50 Santa will be in.
Campaign Checklist
To make sure you don’t make these mistakes on your next campaign, be sure you:
- Determine your target customer acquisition costs and threshold for positive ROI.
- Understand what the costs are for your entire Web channel.
- Compare your costs and returns across digital delivery modes, such as search (paid and organic), e-mail, advertising, and Web site.
- Put the proper analytics in place to access this data in real time.
- Ensure that you allocate resources (human and financial) to optimize the campaign after its launch based on the results. The suggested minimum allocation is 5 percent of the campaign budget.
- If you plan on putting a $50 bill in a direct mailing, don’t forget to send one to me. In fact, send two.
Questions, comments, have a campaign success or failure story? E-mail me, and I may include it in an upcoming column.
