How To: Calculate The Cost of One Customer
Most competitors have no idea what their customer is worth. If their marketing budget is a percentage of their sales, during a recession they might cut their ad budget…
If you continue advertising and marketing at your current level, you’ll get their customers.
1. Compute your average sale and your profit per that sale.
2. Compute how much additional profit a customer is worth to you by determining how many times they come back and buy. Be conservative.
3. Figure out precisely what a customer costs by dividing your marketing budget by the number of customers it produces. If you spend $1,000 on marketing and you get 1000 customers, they’re costing you $1 a piece. Prospects are the same. Maybe out of that $1,000 you get 10,000 prospects for $.10
4. Compute how many sales you get for so many prospects. The percentage of prospects that actually become customers. This will be your “Closing. Ratio.” If you get 10,000 prospects and you have 1,000 customers, that’s a 10% Closing Ratio.
5. The Marginal Net Worth of a customer is computed by subtracting the cost to produce that customer from the profit you expect to earn from them over their lifetime. Ultimately, you’ll want to spend less and less getting the customers, in other words, your acquisition cost, but this method is a way to generate customers short term.
