Wednesday, January 28, 2015

Easy Ways to Calculate Cost of Acquisition

Let's say you are spending money on some form of advertising or promotion.  Are there ways to determine if it's pulling its weight?  Many small businesses employ "hunch" or "feel" in assessing their expenditures, or in a slightly more sophisticated vein comparing total receipts and sales to marketing costs and watching the trend.   Times of good revenues are assumed to relate to quality advertising and promotion; lean times would mean advertising didn't work.  It's crude, but at least it's a start.

The big dogs employ much more sophisticated metrics in an effort to assess what is called the Cost of Acquisition (COA).  In a nutshell, the dollar value associated with each new customer.  Ad and promotion strategies that have a high COA will (or should) be scrapped in favor of lower COA options.  Data from POS and registers (and others) are compared to cost figures and a fairly good picture can be drawn of the strength of various buys.  Small businesses can't hope to work in this space: the staffing, cost and time demands are too great.

But there is hope for a decent set of metrics.  The very easiest approach requires being assiduous in asking customers how they found you.  Ask at whatever stage they approach.  For a service provider that can be done at the point of initial contact.  For a retailer, at the point of sale.  A simple but highly effective spreadsheet can be built with each new customer recorded, their date of contact, their associated revenue, and the means by which they became aware of you.

Let's now say you want to see what a new ad is doing for you.  Filter for all customers who say that ad drew them to, and total up the revenue associated with those customers, and divide by the number of new customers.  The resulting dollar figure is good working COA.  Strategies where the advertising cost more per new customer than the revenue they bring in are probably unproductive.  But you will learn a lot from that calculation!  Done for all of your advertising and promotion you can begin to weed out the less helpful channels and make your marketing more efficient.

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