Cost Per New Customer
Cost Per New Customer is one of the easiest metrics to measure, hence, it is beloved by many marketers.
The marketer spends $1,000, yielding 25 new customers. Cost Per New Customer is measured as ($1,000 / 25) = $40.00.
The marketer compares CPNC across all marketing activities, seeking to maximize activities with a low CPNC.
A metric that yields a better result is Profit Per New Customer, or PPNC. In order to calculate PPNC, we need two additional metrics.
- Average Order Value --- the average amount that a new customer spend when placing a first order.
- Profit Factor --- visit your finance department, and find out how much demand (independent of ad cost) flows through to profit.
- Marketer spends $1,000 on a marketing program.
- 25 new customers are acquired.
- The average order value is $150.
- 40% of demand flows-through to profit.
- PPNC = ((25 * $150) * 0.40 - $1,000) / 25.
- PPNC = ($3,750 * 0.40 - $1,000) / 25.
- PPNC = ($1,500 - $1,000) / 25.
- PPNC = $500 / 25.
- PPNC = $20.00.
In most cases, marketing for new customers results in a loss. Let's assume that instead of 40% of demand flowing-through to profit, only 20% of demand flows-through to profit. Now see what happens to the calculation:
- Marketer spends $1,000 on a marketing program.
- 25 new customers are acquired.
- The average order value is $150.
- 20% of demand flows-through to profit.
- PPNC = ((25 * $150) * 0.20 - $1,000) / 25.
- PPNC = ($3,750 * 0.20 - $1,000) / 25.
- PPNC = ($750 - $1,000) / 25.
- PPNC = -$250 / 25.
- PPNC = -$10.00.
If the customer generates $20.00 of profit in the next twelve months, then things are fine, because we are willing to lose $10.00 of profit now in order to gain $20.00 profit in the future.
We also look at the sensitivity of profit per new customer. If we believe that the economy will be 20% worse next year, we can run our analysis assuming decreased productivity.
- Marketer spends $1,000 on a marketing program.
- 20 new customers are acquired (25 * 0.80 due to the economy).
- The average order value is $150.
- 20% of demand flows-through to profit.
- PPNC = ((20 * $150) * 0.20 - $1,000) / 20.
- PPNC = ($3,000 * 0.20 - $1,000) / 20.
- PPNC = ($600 - $1,000) / 20.
- PPNC = -$400 / 20.
- PPNC = -$20.00.
As you can see, Cost Per New Customer (CPNC) is a good thing. Profit Per New Customer (PPNC) is even better!
UPDATE 12/7/2008: A new post contains a link to a spreadsheet that allows you to calculate these metrics for your marketing activities.
Labels: CNPC, Cost Per New Customer, PPNC, Profit Per New Customer