Calculating the cost of acquiring a customer.
Assignment #1 Quantitative Literacy Rubric for Calculation
Calculating Customer Acquisition Costs
Do you know how much it costs to acquire each new customer via your website?
Websites are often a significant cost to companies and yet their performance is rarely measured. Your website provides you with an opportunity to acquire new customers in a measurable and cost effective way.
To achieve this, you first need to know what it costs you to acquire each new customer via the website today. Once you know this you will then know whether these new customers are profitable. Obviously if it costs $100 to acquire a customer to your website who only spends $40 during their lifetime then you are losing money.
In order to ensure that the website is positively contributing to the company’s bottom line it is recommended that you examine the cost of customer acquisition as a key performance indicator of your website.
To calculate your cost you need to:
1. Identify the number of new customers per month. This
is the number of new customers that have purchased goods or services, requested a catalog, visited the company website, called in to make an appointment or get more information, or any other documented activity which increases your customer base.
2. Calculate the start-up costs associated with the website, mailing catalogs, and the operating costs associated with the customer service or call center. Include in this the cost of operating any department, physical or virtual, that the customer can go to get more information about your product or service.
3. Calculate the cost of maintaining marketing literature
and materials including website costs, catalogs, announcements, fliers, and any other charge related to publications or online marketing.
4. Calculate the average monthly cost of promotions. This includes online and offline promotions that are one time or continuous.
5. Add all the monthly costs and divide by the number of
new customers per month.
Read the case below and answer the questions following this information.
Phil Santos owns an independent mobile phone store. He has a wonderful personality, is very knowledge about the products he sells and people flock to his store. Phil would like to start selling online so he can reach more customers.
He’s talked with website developers and the firm he decided to go with will charge him $9500 to build the site. Phil wondered why the site was so expensive and explored the idea of building it himself. He found out it’s complicated to build a site that can take payments so he decided to be safe rather than sorry and have it built by experts. They also gave him an estimate of $5300 a year to maintain his site. This will allow him to update the site constantly and add new pictures and videos as new products and promotions are introduced over the course of the year.
A marketing research firm found that he should expect about 133 sales a month averaging about $290 profit per sale. Phil was thrilled with this news and decided to spend $15,000 to add a new room to his store to be used as a shipping area.
He also wanted to make his sales literature and in store promotional materials such as banners, and promotional give-a-ways consistent with the look of the website. Phil has worked with a graphic design class at the local community college and knows it will cost $2300 a year to have the materials designed and printed.
What is the cost to acquire each new customer? Show your full calculation.
Does it make sense for Phil to sell his products online? Explain your answer in paragraph form, 1 page, incorporating the data you gained by doing the calculation above.