Calculating the Costs of Acquiring New Customers with Google AdWords

By Jeff Sauro

Customer analytics can quantify costs. If you’re contemplating driving more traffic to a website as part of a new customer acquisition strategy, it’s helpful to estimate the cost of acquiring these customers. Using Google Adwords is one of the most popular methods for online advertising. Merchants select the keywords that prospective customers search for and then pay only when customers click through.

To compute the costs of acquiring new customers, follow these three steps (the example uses a cost of $1-per-click):

  1. Determine the cost per click for an Adword.

    Keywords for your product or industry can range from a few cents to several dollars per click. The more popular a keyword, the more it gets bid up by other competitors in your industry.

  2. Estimate the conversion rate.

    Just because someone clicks through doesn’t mean he or she becomes a customer. This conversion rate will also vary by product, industry, and type of landing page. Typically, conversion rates are low, often around 1%. To estimate your conversion rate, try a small-scale test and see which percent of customers make a purchase (or even register to get more information). A response rate of 1% takes 100 clicks to get one customer.

  3. Compute the acquisition cost.

    Divide the response rate into cost of a click. In this example, the acquisition cost is $1/.01 = $100. You can then experiment with different costs of Adwords campaigns to decide if it’s worth spending more money. For example, a different AdWord may cost $5 per click and result in a slightly higher conversion rate of 1.5%, because customers who search using that keyword will be more qualified leads. The acquisition cost is then $5/.015 = $333.33 per customer.

Knowing the lifetime value of a customer — for example, say that customers or a customer segment spend on average $1,000 over a year — means that both costs of acquisitions would likely be worth the initial investment.