How to Account for Customers Acquired with Social Media
The cost of customer acquisition (CCA) refers to the marketing, advertising, support, and other types of expenses required to convert a prospect into a customer. This can be difficult to determine with social media. CCA usually excludes the cost of a sales force (the salary and commissions) or payments to affiliates. Some companies carefully segregate promotional expenses, such as loyalty programs, that relate to branding or customer retention. As long as you apply your definition consistently, you’re okay.
If your goal in social media marketing is branding or improving relationships with existing customers, CCA may be a bit misleading, but it’s still worth tracking for comparison purposes.
The definition of your customers and the cost of acquiring them depend on the nature of your business. For instance, if you have a purely advertising-supported, web-only business, visitors to your site may not even purchase anything. They simply show up, or perhaps they register to download some information online. Your real customers are advertisers. However, a similar business that’s not supported by advertising may need to treat those same registrants as leads who might later purchase services or pay for subscriptions.
The easiest way to define your customers is to figure out who pays you money.
Comparing the costs of customer acquisition
You may want to delineate CCA for several different revenue streams or marketing channels: consumers versus businesses; products versus services (for example, software and support contracts); online sales versus offline sales; and consumers versus advertisers. Compare each one against the average CCA for your company overall. The formula is simple:
cost of customer acquisition = marketing cost ÷ number of leads
Be careful! This formula can be misleading if you calculate it over too short a time frame. The CCA may be too high during quarters that you undertake a new activity or a special promotion (such as early Christmas sales or the introduction of a new product or service) and too low during quarters when spending is down but you reap benefits from an earlier investment in social media.
Calculate your CCA over six months to a year to smooth out unique events. Alternatively, compute rolling averages (taking an average over several months at a time, adjusting the start date each month — January through March, February through April, March through May, and so on) to create a better picture of what’s going on.
In this image, Rapport Online ranks the return on investment, defined as cost-effectiveness in generating leads, for a variety of online-marketing tactics. The lowest ROI appears at the bottom of the cube, and the highest appears at the top.
Social media marketing runs the gamut of rapport-building options because it involves some or all of these techniques. On this scale, most social media services would probably fall between customer referral and SEO or between SEO and PR/link building, depending on the type and aggressiveness of your effort in a particular marketing channel. Traditional offline media, by contrast, would have a lower ROI than banner advertising.
As with performance metrics, business metrics such as CCA and ROI aren’t perfect. If you track everything consistently, however, you can at least compare results by marketing channel, which can help you make informed business decisions.
If you garner leads online but close your sales and collect payments offline, you can frame CCA as the cost of lead acquisition, recognizing that you may need to add costs for staff, collateral, demos, travel, and other items to convert a lead.
For a rough idea of your cost of customer acquisition, fill out the cost calculator with your own data. For start-up costs, include labor expense, contractors for content development, and any other hard costs related to your social media activities. Substitute social media costs for web expenses.
To put things in perspective, remember that the traditional business school model for offline marketing teaches that the CCA is roughly equivalent to the profit on the amount a customer spends during the first year.
Because you generally see most of your profits from future sales to that customer, you must also understand the lifetime customer value (how much and how often a customer will buy), not just the revenue from an initial sale. The better the customers, the more it’s worth spending to acquire them. Harvard Business School offers an online calculator for determining lifetime customer value.
Be sure that the cost of customer acquisition (CCA) doesn’t exceed the lifetime customer value.
In the 2014 Shop.org/Forrester Research Inc. State of Retailing Online study, Forrester finds that retailers continue to invest in digital media, including ads on social media, to acquire new customers.
Try to keep the total cost of marketing by any method at 6 percent to 11 percent of your revenues; you can spend less after you have an established business with word-of-mouth referrals and loyal repeat customers. Remember, customer acquisition is only part of your total marketing budget; allow for customer retention and branding expenses as well.
Small businesses (fewer than 100 employees), new companies, and new products usually need to spend toward the high end of the scale on marketing initially — perhaps even more than 11 percent. By comparison, mature, well-branded product lines and companies with a large revenue stream can spend a lower percentage on marketing.
Obviously, anything that can reduce marketing costs offers a benefit. See whether your calculation bears out that cost level for your investment in social media.
One is silver and the other gold
You might remember the words to that old Girl Scout song: “Make new friends but keep the old; one is silver and the other gold.” To retain customers, apply that philosophy to your policy of customer satisfaction. That may mean anything from sending holiday greetings to establishing a loyalty program with discounts for repeat buyers, from entering repeat customers into a special sweepstakes to offering a coupon on their next purchase when they sign up for a newsletter.
A marketing truism on LinkedIn states that it costs anywhere from 3 to 30 times more to acquire a new customer than to retain an existing one. Although costs vary with each type of business, it’s common sense to listen to customers’ concerns, complaints, product ideas, and desires.
Thus, while you lavish time and attention on social marketing to fill the top of your funnel with new prospects, don’t forget its value for improving relationships with current customers and nurturing their involvement with your brand.
The same 2014 Forrester report on retailing online also noted the critical value of social media in building customer engagement.