How to Measure Cost per Acquisition
Any effective marketing strategy requires that you understand how much each sale costs by sales channel. If you are like most insolvency practices, you will probably have numerous campaigns taking place across many marketing channels. You could well be utilising direct mail, pay-per-click (PPC) as well as search engine optimisation. This article looks to explore how to measure cost per acquisition.
So that begs the question, how do you measure how much you are going to spend in each channel?
To answer this question, you first need to know the average value of a customer through that sales channel. At this point you can have a good understanding of how much you should be prepared to spend to acquire a new customer.
The average value of a customer will vary widely from firm to firm, though for now let us say that the average value of a new customer is £5,000. This will allow me to demonstrate the limits of your cost per acquisition. There are no hard and fast rules for limiting the cost of acquisition. Setting your cost of acquisition should be informed by your overall sales margins. Generally, insolvency products are high margin, and as such a general rule of thumb would be to limit the cost of acquisition to between 15-25% of the average customer value
Measuring your cost of acquisition
Setting a limit for your cost of acquisition is the easy part. It will be considerably more difficult to set up your campaigns so that you can track sales by source. We need to do this to ensure that you do not exceed your cost per acquisition limits. This is where good analytics, as well as a thorough understanding of your sales channel is vital.
For many marketing channels, the cost of acquisition is front loaded. Using direct mail as an example, you will need to invest resources in graphic design, copy writing, printing, postage etc. These upfront costs will be spread out over time when these channels begin to generate engagements. The most important thing here is to note that the cost per acquisition will vary depending on the marketing channel.
Deciding how much to allocate to each campaign will depend on your overall marketing strategy, target audiences and brand management. Once you are tracking each campaign effectively, you will have a better idea as to the true cost of acquisition and average value per customer.
Direct Mail Example
Many firms target potential clients based on events such as limited company county court judgements and winding up petitions. As this is a widely adopted practice in the industry, the competition for engagements is fierce, which ultimately drives down conversion rates for the individual firm. For illustration purposes, I am going to assume a response rate of 1%.
- Letters sent: 10,000
- Total Campaign Cost: £20,000 (includes data cost, design, printing, postage)
- Response Rate: 1%
- Conversion Rate: 10%
Based on the above response and conversion rates, we could get 100 people to respond to the campaign and 10 people to engage. This means that our new cost per acquisition for this channel is £20,000/10, or £2,000. This of course is higher than our initial cost per acquisition limit of £1,250. You would need to make a decision in this instance whether it is worth investing in this channel.
Pay per click is the process of buying ads online where your advertisement appears on popular search engines, social media or participating websites. The purpose here is to drive potential customers to a landing page where you hope to encourage them to engage with your company. The effectiveness of pay per click as a client acquisition strategy vary based on a wide range of factors, including the value proposition that you make to your potential customer as well as the cost per click. Insolvency firms operating successfully online offer significant resources to potential clients, as a means of generating trust and legitimacy. The cost per click for insolvency products is currently very, very high due to the significant average customer value as well as the high margins associated with them. This may well lead to a race to the bottom in terms of margins, and the viability of using pay-per-click as a marketing channel is dependent on your cost per click as well as your conversion rate.
- Total Clicks: 400
- Total Campaign Cost: £15,000 including ads and landing page set up etc.
- Conversion Rate: 5%
Using the numbers above, from the 400 users who clicked our ad, 20 of them may went ahead and engaged. From this, we can establish that the cost per acquisition in this example would be £15,000/20 or £750. In this example, this is well below the limit of £1,250 that we set, which would be encouraging.
With pay per click, one way of reducing your cost per acquisition is to bring down the cost per click. Relevancy and quality are important here. Placing ads with a search engine that relates directly the content on your website can provide a lower cost per click. You should always be looking to bring down your cost per click at the same time as improving your conversion rate. This can have a dramatic impact on your cost per acquisition.
That concludes this post looking at your cost of acquisition. Online channels provide excellent tracking capabilities. Establishing your target and actual cost of acquisition can be a relatively simple task in expert hands. Measuring the cost per acquisition in non digital channels can become more complex due to a lack of tracking options. In such instances it is recommended that you consider dedicated 0800/0300 phone numbers to track responses.