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Optimizing Customer Acquisition Costs: A Linchpin to Your Profitability

Digital Library > Defining and Serving a Market > Sales analysis “Optimizing Customer Acquisition Costs: A Linchpin to Your Profitability”

Simple arithmetic shows how new customers affect margins.

If asked how much it costs to produce each unit of what you sell, you’d probably have a precise answer. If asked how much it costs to sell each unit, could you be as specific? Understanding customer acquisition costs is absolutely critical to maintaining margins.

A software producer was using trade-show attendance and journal advertising to generate leads. This company’s software had an average selling price of $250,000. We took leads generated and totaled the cost of the trade shows and ad campaigns. Then we divided the cost of the lead generation materials by the number of leads generated to determine a cost per lead. Each lead cost $1,365. That may seem steep, but with an average sale of $250,000, the ratio seems acceptable.

The Real Cost of Generating a Lead

Going on to look at the closure rate gives us a more complete picture of the real cost. The closure rate on the leads generated was 20%. This means the cost of each lead closed was really $1,365 divided by .20, which comes out to $6,825.

Formula: Cost of each lead generation = cost of each lead / closure rate (%).

To further document how customer acquisition costs can erode margins, let’s consider the cost of selling. Since potential customers weren’t close to each other, and each sales call was lengthy, the salesperson averaged 10 calls per week. The cost of the salesperson was $80,000 (salary) + $60,000 (expenses) = $140,000. Dividing this by the number of calls made determines the cost per call. In this case, the salesperson made 10 calls per week for 46 weeks. Two weeks were lost to vacation. The salesperson had 10 paid holidays and an additional 10 days were lost to meetings and sick days. Dividing $140,000 by 460 gives us $304.35 as the cost of each sales call.

Formulas:

  • Cost of salesperson = annual salary + annual expenses.
  • # weeks per year calls are made = 52 – vacation – paid holidays – meetings - sick days (Note: all figures are in weeks, not days).
  • Total calls made = calls per week x weeks per year calls are made.
  • Cost of each sales call = cost of salesperson / total calls made.

The Real Cost of Making a Sale

The sales cycle for a $250,000 purchase is not short. The average lead took six calls to reach a decision. Six calls at $304 per call means it costs $1,824 to reach a decision. This particular software producer won 20% of the sales. This means the cost of selling was $1,824 divided by .20, which comes out to $9,120. The total cost of acquiring a new customer, including generating the lead and closing the sale, was $6,825 (lead generation) + $9,120 (selling), or $15,945! Decreasing the profit margin by $15,945 was unacceptable.

Formulas:

  • Cost to reach a decision = # calls to reach decision x average cost per call.
  • Cost of selling = cost to reach a decision / % of sales won.
  • Total cost of acquiring new customer = cost of lead generation + cost of selling.

Solution: Developing a sales system that integrated direct mail and telemarketing to generate and qualify leads. The system decreased the cost per lead generated from $1,365 to $13.80. The qualification process allowed the salesperson to decrease the average number of calls to decision from six to four and increase the closure rate from 20% to 30%. The net effect was to lower the cost of acquiring a new account from $15,945 to $3,727, resulting in an improved bottom line of $12,218 per unit sold.

Writer: Frank Martin is president of Dynamic Selling Systems, Atlanta.

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