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.

Next, Learn Here More On How To Advertise Online……And Then Watch This FREE 26 Part Step-By-Step VIDEO Course

With today’s website tracking software and services you can find out a lot about the people who visit your website. You can learn where they’re from, what kind of browser they’re using, how long they stayed on your site, and a whole lot more. But what all this high tech intelligence won’t tell you is what kind of people they are, and how likely they are to be transformed by your Web presentation from viewers to customers.

Your ability to convert website visitors into clients depends on your ability to find the soft underbelly of their subconscious desire. After all, if someone is happy with what they’ve already got, they don’t need you, but if they were truly one hundred percent happy, they wouldn’t bother coming to your website. Therefore every visitor that comes to your site is a potential client whether they know it or not.

The Setup’s The Thing

Your website presentation has to find that annoying little subconscious scab just under the surface and pick at it until it becomes a full blown irritation that fosters discontent and a desire for change. That discontent is your opening to make your value statement.

We refer to this process as The Setup. Like any good presentation you cannot, or rather should not, just blurt out how great you are, but rather you have to set the scene. Like any good story, the punch line, moral, or payoff only works if it is properly setup. Far too many website presentations suffer from premature pitch climax.

The ability to transform viewers into customers requires patience. Entrepreneurial companies tend to view the setup as a waste of time, and they fear losing viewers before they ever get to the so-called “good-stuff.” But without a proper setup, an audience is just not primed to accept what you have to say.

You can’t sell anybody anything unless they understand they’ve not been getting everything they need and deserve. That understanding creates dissatisfaction with your competition and opens the audience’s minds to what you have to offer. In short, the setup needs to touch a psychological nerve.

The Customer Is Always Right – Not Quite

We’ve all heard the expression, “the customer is always right.” The fact is the customer is not always right, and in many cases they don’t really know what they want or what they should have; and sometimes even when they do, they resist it because of a variety of misinformation, misunderstanding, self-doubt, and preconceived notions of conventional wisdom. It’s your website presentation’s job to set visitors on the right path.

Being The Expert Inspires Confidence

You’re supposed to be the expert in what you do, and if you are, you need to have the ability to dig deeper into what people really want, need, and desire. I am always reminded of friends of mine who hired an interior decorator to furnish their new home. The decorator asked them what kind of furniture they liked. They answered that they were looking for Colonial, to which the decorator answered, “No you aren’t. What you want is Country French.” And after he showed my friends what he was talking about they quickly agreed. The decorator knew his business and understood the clients. Yes the clients liked the idea of the homey Colonial look they’d seen, but not being furniture experts they didn’t understand what the options were, and what kind of furniture best suited their lifestyle and budget, while still providing the homey rustic but comfortable aesthetic they wanted. Customer satisfaction is about providing what the client really wants and not necessarily what they say they want.

Learn How To Communicate So Audiences Get It

Let’s face it; we all like to read about how the digital revolution has opened up the business world to more audience influence, but the fact is people are influenced and manipulated and desires created through marketing and advertising as much as ever. How many website owners actually benefit in any meaningful way from social networking and search optimization, or do they do it because it’s expected and promoted by proponents as the tactic du jour.

If you think a particular song you like is played on a thousand radio stations because it’s good, or even because it has a following then you are living in a fantasy world. If you thing the vast majority of viral videos produced by corporations go viral all by themselves then think again.

Audiences are being manipulated and transformed into customers all the time, not because companies responded to what the public says, but rather to how the public reacts to various communication and marketing stimuli. What’s truly amazing is how bad companies are at doing it. With all of the television industries’ research into viewers, they still fail to deliver consistent quality programming that people want to watch. Every Fall new shows are yanked faster than a Nolan Ryan fastball, but the same crappy commercials live-on for what seems an eternity. Television viewers are a captive audience and if they want to watch their favorite show they have to tolerate the commercials (PVRs aside), but the Web is different. If your website presentation stinks, nobody is going to stick around to absorb the smell.

Web Television Convergence Has Arrived

If you think of your website presentation as nothing more than a digital brochure, you’re already behind the curve. Welcome to the Web on TV.

All you need is a laptop computer or one of the new gaming consoles attached to your big screen TV to access the Web on television. And as network programmers scramble to get their acts together more and more people are opting to spend their television time on the Web. Kind of makes you rethink what kind of website presentation you should be offering. It’s time to start thinking of your website as your own business channel and the content on it as programming. It’s the future and it’s here, now.

Who Visits Your Website?

Before website visitors can be transformed into clients, we have to understand who they are in terms of their mental outlook or frame of mind when they first arrive at your home page.

1. Accidental Tourists

Accidental Tourists are website visitors who find their way to your website by serendipity. Your company’s link may have come up in a search for something mentioned on your website, but not something that’s a core element of your business. But just because these people didn’t really intend to visit a site like yours doesn’t mean they’re a waste of time. Perhaps they never thought of using your product or service, or perhaps they never realized how much they really wanted what you have to offer. If your website presentation is exciting, meaningful, and entertaining you at least have the opportunity to plant the seed of desire for your product or service.

2. Brain Pickers

Brain Pickers show up at your site with little intention to buy anything, in fact they’re there to pick your brain and find out how to do what you do for themselves. But if you’re truly an expert at what you do, you at least have the opportunity to show these people that what you offer is special, and doing it right requires a company with your skills and resources.

3. Penny Pinchers

These guys are looking for a bargain. You are on a list and they are checking out who is offering the cheapest solution to their problem. But not all Penny Pinchers are penny-wise and pound-foolish, some, just need to understand why you’re the best at what you do, and why what you are charging is the real bargain.

4. Tire Kickers

The Tire Kickers love to look but rarely buy. They want what you’ve got but they just can’t make the commitment to buy it. They visit your website a hundred times, each time pressing their noses against the virtual storefront window trying to make a decision that rarely comes.

It’s up to your website presentation to push them over the edge. If they want what you’ve got, you can sell it to them. All you need to do is find that soft under belly of desire that gets them eager to spend their money.

5. Missourians

These guys want what you offer but need the reassurance of some practical input to get them to buy. The desire is there, but it’s frustrated by their mental need to justify the purchase with practical excuses. “But Honey, I know little Johnny is only three, but think of the eye-hand co-ordination he’ll learn playing these video games.” People ultimately buy what they want, and rationalize the purchase with logic and reasoning, but without desire, no amount of statistical evidence will work.

6. The Enemy

If you’re any good, you’ll have plenty of competitors hanging around your website looking for ideas they can use. It’s all part of the game. Better to be out there showing people what you’ve got than hiding, afraid someone might take advantage. Besides if you’re really good, you’ll always be at least one step ahead of the competition anyway. That makes you the leader and them the follower. And everybody wants to do business with the leader.

7. The Needy

The Needy crave what you’ve got but need a lot of reassurance, handholding, and customer support. These guys have the potential to be good customers but your presentation has to make it clear that you’ll be there to answer questions and concerns and not just leave them in the lurch like so many other Web-based businesses do after they’ve got the sale.

In The End

If you’re fed-up with social networking self-gratification, frustrated by ever changing site optimization requirements, and ineffective advertising then it’s time to re-evaluate what your website presentation says and how it says it.

In the final analysis it’s all about communicating your emotional value proposition using your most important venue, your website; delivered in the most engaging, informative, and memorable manner that compels your audience to pay attention to your marketing message, and act upon it.

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NOTE:  The following is a guest post from one of my favorite internet marketing mentors.

Why I Love Affiliate Marketing – Part 2
By Jimmy D. Brown of “Affiliatenaire”

Pop quiz time.  What does “HTML” stand for?  Don’t know that one?  How about this – what does “FTP” stand for? OK, one more chance.  Do you know how to work with either?

That brings me to the second reason why I love affiliate marketing…

      ** You don’t need to build a website **

What scares people more than creating a product is building a website! 

* What in the world is HTML?  Or FTP?
* How much does the software cost?  And hosting?
* How do I upload files?
* Why isn’t it formatted correctly?
* Why don’t my graphics look like the ones the pros have?

If you are a complete beginner, it can be very difficult (even using templates) to get an attractive website in place. And hiring a professional to do it fo ryou is out of the budget for most people.

But, with affiliate marketing, you don’t need to build a website.  You simply send visitors to someone else’s professionally designed site through your affiliate link.

     SIDEBAR:  Just in case you’re interested, HTML stands
     for “hypertext markup language” and is the coding
     used to build webpages.  FTP stands for “file transfer
     protocol” and is the process used for moving files
     from your computer to a website, or vice versa.

Really, in a manner of looking at it, you get to take advantage of the time and money invested by someone else to develop the site.  Think about it:  when you promote an affiliate link, it reflects firstly upon YOU.  You are the one who is advertising the link, recommending the product,
sending people who have interacted with YOU to the website.

The professional site of someone else really represents you as the promoter, in the eye of those who have clicked through your link.

You get the benefits without the bother.

That’s why I love affiliate marketing.

You don’t need to build a website.

…………………….

Jimmy D. Brown is the author of “Affiliatenaire”, teaching you how to create big-time affiliate commission checks in only 1-3 hours each week.  Discover how you can get cash in the bank without a website, experience or even an idea!
Visit : http://avcbi-businesscenter.com/go/affiliatenaire

…………………….

I am certain that, as a business owner, you have often entertained the question as to how much to spend and where to spend your advertising dollars. For most small business owners, these questions can add to the headaches suffered in the course of normal everyday operations of their business.

THERE ARE NO SIMPLE ANSWERS

The how much to spend and where to spend it questions have no easy answers.

Depending on your type of business, many people suggest that the *how much* should be equal to anywhere from 4% to 10% of your gross receipts.

The quandary is that a business cannot survive without a fresh flow of incoming customers. But, a business can seldom generate a fresh stream of customers without spending money to get the word out about their business.

THE CHALLENGE OF DEVELOPING EFFECTIVE ADVERTISING

Have you ever paid for advertising and sat back to await the fresh flow of customers, only to find yourself sitting and sitting and then sitting some more?

Don’t feel bad about that. It has happened to many of us before.

See, knowing where to spend the advertising money is not enough to get the job done.

Where to spend the money only begins to highlight the other issues connected with advertising:

• Marketing Plan
• Advertising Strategy
• Headlines, Ad Copy and Visual Presentation
• Tracking the Success of Your Advertising Campaigns

THE MARKETING PLAN

The Marketing Plan is used primarily to identify your own products and services, costs, strengths, weaknesses and the strengths and weaknesses of your competitors.

ADVERTISING STRATEGY

It is important to understand what you expect to gain from your advertising.

Do you simply wish to get your name known so that when your customer will need you, they will think of you first? Or, do you wish to get your customers in your front door on Saturday?

Do you want your customers to come in and take a look around to discover the next object that they cannot live without? Or, do you want them to come in and buy a specific widget?

Do you hope that enough people will come in to buy enough products or services to pay for your single ad? Or, do you expect to gain a lifelong customer who will help pay for your advertising over the course of several years?

When you know what you want, then you will better understand just how to do it.

HEADLINES, AD COPY AND VISUAL PRESENTATION

You might be surprised how many business owners put out advertising without regard for the quality of the sales pitch or presentation. The quality of your distribution outlet or the amount of money you spent to get there will do little for you if the advertising vehicle is a junker.

Test all of your advertising materials in smaller markets before blowing your advertising bank roll on it. You must absolutely know the value of your advertising before putting large sums of money behind it.

TRACKING THE SUCCESS OF YOUR ADVERTISING CAMPAIGNS

Tell your customers to save another 10% when they tell you they heard or saw your ad in such-and-such location. Suggest that they can register to win a free widget if they fill out a form and have them to tell you how they heard of your business. Advertise a specific widget in your ad and track the sales of that widget.

It does not matter how you track your advertising — just make sure you do it!

IN SUMMARY

The ideal way to spend your advertising budget is to buy a rifle with a high-powered scope and to only shoot your targets in the light of day.

If you are not tracking your advertising, then you are shooting a pellet gun without an attached scope, with blinders on, and shooting in the dead darkness of night.

Even with a bigger gun, the blinders in the dark constitute the single largest mistake made by advertisers. If you are unable to track your advertising to learn what is working well, what is working somewhat, and what is a money pit, then you are condemned to repeat your mistakes over and again.

By relying only on gut instinct, you may be choosing to spend more money in the money pit and to lose all of your money in the process.

When you get down to the nuts and bolts of making money from your advertising, you should plan, prepare, track and study your results. You must have factual information on which to base your advertising decisions. When you are making the right advertising decisions, then making money from your business might just come easy.

-Albert-