A Free-Reprint Article Written by: Hunter Waterhouse

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

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Article Description:
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).


Additional Article Information:
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1679 Words; formatted to 65 Characters per Line
Distribution Date and Time: 2009-11-19 10:00:00

Written By:     Hunter Waterhouse
Copyright:      2009
Contact Email:  mailto:hunter.waterhouse@...



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Track And Measure Your Advertising, Customer Acquisition Costs, And The Lifetime
Value Of A Customer
Copyright (c) 2009 Hunter Waterhouse
Online Marketing for Local Businesses
http://onlinemarketinglocal.com/



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/


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