How Much Would You Pay For A New Customer?

Jim Negron — Tue, 05 Jan 2010 16:08:44 +0000

What if there was a store that sold customers? No, not a store that sells to customers, I mean a store where small businesses could go and purchase new customers. And let’s say that store has all types of customers on the shelves, like in real life, difficult customers, cheap customers, average customers and even best customers.

You hear about the store and because every business can use new customers, you decide to go shopping. Like every good shopper you’ve got a list, you want to buy only “the best customers” and you want a bunch of them. But before you fill your cart you’ve got to come to grips with two factors: 1- how much do customers cost and 2- how much money do you have to spend (your budget)?

Let’s deal with factor one first. How much would you pay for a new customer? Isn’t the amount you would pay for anything determined by the value of the product or service. The same rule should apply to customers. So before we ask the question, how much are you willing to pay for a new customer, let’s ask how much is a new customer really worth. Here’s one method you can use.

Small Business Example: ABC Dry Cleaners

$40.00 – Dollar amount of an average sale

30% – Average profit margin

18 – Average number of sales per customer per year

2 – Average number of years a customer continues to purchase (customer life)

Using the numbers above, let’s compute the value of a customer

$12.00 profit x 18 sales per year x 2 year customer life = the Average Lifetime Value of a Customer: $432.00

So, we have determined, for our example business (ABC Dry Cleaners), that if they pay less than $432.00 for a new customer, on average they will make a profit. The point is, not to evaluate the value of a customer on just the initial sale. Furthermore, if our example business buys wisely, and pays less than $432.00, say $50.00 for a new customer, they’ll be way ahead of the game.

Work out the numbers for your business and go on a shopping spree! Buy as many new customers as you can. But wait minute, you might have a limited amount of cash on hand. Furthermore, your cash flow may not allow you to wait up to two years to recover the profit. That brings us to factor number two: your budget. The most important thing to consider here is being consistent. You can start with a small budget and expand it as cash flow permits. Determine a budget that you are comfortable with and then stick with it.

Well, now you have an idea of how much to spend on new customers and what your shopping budget is, but unfortunately, there isn’t a customer store where you can go to buy them. if only it were that easy.

Don’t despair, you can get new customers with advertising. But you’ve got to pick an advertising method that is measurable. Direct mail advertising is very measurable and it is cost effective. You can even attract the type of customer your looking for (your definition of the best customer), by using a specialized mailing list.

Keep close track of the results of your mailing. Then compute your cost per customer: Cost of the mailing divided by the number of customers generated. By fine tuning your mailing list, mail piece design and special offers you can increase the response rate and lower your cost per customer.

Advertising isn’t easy, but if you know the cost to generate a new customer and the value of that customer, you will be well on your way to running successful advertising campaigns.

We recently added an easy to use calculator at our website to determine the lifetime value of a customer. Check it out: CLICK HERE

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How Much Would You Pay For A New Customer?