As a small business owner, you know that maintaining a large and diverse customer base is key to staying profitable. If you’ve been in business for any length of time, however, you might realize that the cost to acquire new customers and keep current ones varies greatly.
Let’s examine how the benefits of acquiring new customers compares to keeping current customers, as well as the pros and cons of each.
Calculating Acquisition Costs
Many businesses, large and small, don’t do a very good job of accurately calculating the cost of acquiring a new customer, more commonly called cost per acquisition (CPA). To calculate your CPA, start by making a list of every campaign you conducted over a set period of time. To see the greatest return, it’s probably best to measure over a 12-month period, but even six months would be sufficient to give you an idea of your average acquisition cost.
Once you’ve listed all of your campaigns, you need to list the total cost of these campaigns. For traditional media, say a newspaper advertisement, the fees you might need to include are:
- Design (including any revisions)
- Media listing/insertion fees
And these are just the finite costs. Other figures to calculate include:
- Estimate of you and your staff’s time, based on salary. If you spent an hour per day for two weeks talking to the designer/copywriter, negotiating rates with the media outlet, reviewing and finally approving the ad, then your time spent would be 10 hours. This is approximately 25% of your total working hours for a full 40-hour workweek, so if you make an monthly salary of $5,000, then your cost figure should include $312.50 for your time.
- Proration of your cell phone, utilities and real-estate charges. The easiest way to figure these totals is to take the total amount of time figured above (10 hours) and then determine what percentage that is of your monthly time in the office. If you work a 40-hour workweek, then your total number of hours for the month would be 160. The 10 hours spent working on the article is 6.25% of that. If your monthly expenses for cell phone, utilities and rent total $1,200, then you would add $75 for this line item to your total spend for the ad.
Once you’ve figured each of these costs and added them together, you’ve successfully calculated your cost for one newspaper ad. From there, the next step is determining how many sales were generated by the ad. Or if you’re playing the long game, you can also determine how many clients it’s responsible for adding to your roster.
Admittedly, this figure is probably the hardest of all the figures to calculate. In the case of the newspaper ad above, you have a few options. One option is to put in a phone number or URL that is unique to that ad. This will enable you to accurately track the calls and site visits you get from this specific ad. Another less accurate option is to ask customers where they heard about you or your business, or to incentivize them to mention the ad when they reach out to you.
Whatever type of ad you use, don’t forget to include a mechanism (e.g. custom phone number, unique URL) for capturing their responses before you start the campaign. Otherwise, you’ll constantly be playing catch-up and will inevitably have an inaccurate count.
When you are conducting a purely digital campaign, your options for measurement are much easier and can be automatically tracked through both your online ad partner and your website metrics. It’s still important, however, to include the other costs for the campaign (e.g. hours spent) to get a full picture of your return on investment.
What About My Current Repeat Customers?
Bain & Company has famously reported that it costs six to seven times more for a company to obtain a new customer versus retaining an existing one. Additionally, they have reported that you’re 60% to 70% more likely to sell to an existing customer, whereas making a sale with a new customer falls into the 5% to 20% range.
These two figures alone should illustrate how important it is to keep your current customers happy and coming back for more. In the end, it’s customer satisfaction—not ad spending or cost—that keeps current customers happy.
Bain & Company also found that a current customer is four times more likely to go to a competitor if the issue is service-related, rather than product- or price-related. This implies that customers will pay for and value better products, as long your organization provides the customer service to back it up. Furthermore, according to Defaqto Research, 55% of customers will pay more if it guarantees them better service.
All of these figures paint a pretty compelling picture for providing outstanding customer service and working with your current customers to build long-term relationships. While it is a good idea to keep growing your business, you’ll find that satisfied customers can often be great advertising outlets via word-of-mouth. Good word-of-mouth about you and your services can get people in the door, which greatly decreases the amount of money you spend acquiring new clients from paid advertising channels.
Calculating your true cost per acquisition is a time-consuming exercise, but at the end of the day, it is the best way to determine your most effective forms of media and advertising. Spending time to figure it out will pay off for you and your business in the long run.