Traditional marketing is hard for your advertiser to measure. They run ads in print, radio and TV and hope business increases as a result. They know they need an active mass-media presence, but how can they know it’s effective?
Especially in the digital frontier, the fundamental measure on the effectiveness of advertising is how many new customers you are attracting and how much those customers cost.
Here’s a tool you can use to help your clients. In the process, you become much more important as you help them sort through some important challenges:
- What percentage of sales volume comes from repeat or referral customers? These customers are driven to by past satisfaction. Don’t read any further until you’ve decided on a percentage. Give it your best estimate.
- What percentage of sales volume is triggered by location and its exterior signage? These customers come to you because of visibility. Again, write down a percentage, a best estimate.
- Add those two percentages together, then subtract from 100. This is the percentage of new customers who come because of advertising or external forces.
- Now, how many unique customers have been served in the past 12 months? Write down a specific number. They will probably need to consult records.
- Apply the percentage of ad-driven traffic to the total number of unique customers in the past 12 months. This will show how many new customers were served because of advertising. (If ad-driven traffic was 20 percent and Unique Customer Count was 5,000, then you had 1,000 ad-driven customers.)
- Divide that number into the annual advertising budget. This is the Cost of Customer Acquisition by advertising. It’s how much they actually spend on advertising to gain one new customer.Note; The formula doesn’t calculate the cost of referral customers because these customers don’t have a direct cost. They are an indirect cost of customer service and relationship management.
Warning: Their cost of new customer acquisition will likely be much higher than you expected. Don’t let this scare you!
Here are the obvious questions:
Q1: With the high cost of new customer acquisition, why advertise?
A: The primary goal of advertising is to acquire new customers. Repeat and referral business depends on it. Good customers move to other towns, or die, and you never see them again. Additionally, new people move into your market and have no idea you exist. Maintaining top of mind awareness is important.
Q2: If they can’t stop advertising, how can we at least reduce the Cost of Customer Acquisition?
A: What if the advertising message were adjusted to drive response to a specific offer or promotion? A specific call-to-action that results in reaching contacts on a personal level. Wouldn’t it be easier to convince a new contact to enter a free promotion than to come into their store? And, when they’ve learned more about them through their profile and embedded survey data, added insight can lead them through the engagement cycle.
Q3: If referrals are the most efficient way to grow, how can I increase sharing?
A: By marketing directly to respondents (email, text, etc.), your investment in promotions yields recurring value. By incentivizing each entrant to share the promotion with friends and social networks, advertising is leveraged far beyond direct responses. This “snowball” effect gains momentum and future promotions and offers have more impact with less reliance on traditional (expensive) advertising.
Lead generating promotions are one of the most cost-effective and efficient methods of marketing. Combined with creative messaging in existing advertising, marketing expenses become measurable and customer acquisition costs reduced.