“Never stop testing, and your advertising will never stop improving” was said not by a modern day growth marketer but by the godfather of advertising, David Oglivy. Truer than ever, marketing has become more scientific and data-driven. So how do you measure marketing success?
The concept of user acquisition provides a clear answer to this very question. More specifically:
- How much are we spending on paid advertising?
- How much does it cost to acquire each customer?
- How much revenue does a single customer bring in?
Rather than guessing what’s working, user acquisition takes 2 simple metrics, Customer Lifetime Value and Cost Per Acquisition and shows if your current marketing is undoubtedly capturing customers (i.e. the lifeblood of you company).
So, if you choose only one marketing metric this year, choose to execute and track user acquisition. Without it, your growth strategy might as well be guess work. And if it’s guess work, you might as well be toast.
So where to start? With a case study.
CPA In Action: Dog Walk It Out
A Washington-based dog walking company is trying to acquire users in a few up and coming markets they recently launched including Columbus, Ohio, Raleigh, North Carolina, and Madison, Wisconsin.
After 1 month they’ve snatched up a small base of users (100), but it’s much too slow for their tastes. So far, they’ve relied on traditional marketing (billboards, radio ads, and sponsorship) since these new markets not only possess tech-enthusiast millennials but an equal portion of baby boomer “empty nesters.”
The traditional route initially seemed like a good starting point but the reality has been a lukewarm reception. It’s time to ramp up some digital tactics to acquire the millennial markets.
Metric #1: Customer Lifetime Value (CLV)
Our first metric, CLV, is customer revenue: the total amount of money that a customer will spend on your business during your “relationship” together.
The formula looks like this for your average customer:
CLV = average order total ($) * average number of purchases/year (#) * retention time (years)
Putting numbers to it, let’s assume “average order total” for our dog-walking company is $30 spent each month and that they use the service for 1 year (our “retention time”), giving us an “average number of purchases per year” of 12:
CLV = $30 * 12 * 1 year
CLV = $360
So why is CLV important? It’s because CLV will provide a “breakeven” mark for our second metric, CPA, which will tell us if what we’re spending is actually worth the cost.
Metric #2: Cost Per Acquisition (CPA)
Simply put, CPA is customer expense: how much it costs to acquire a customer. The formula looks like this:
CPA = total marketing cost/number of conversions
Going back to our dog walking company, our traditional marketing effort has cost us a cool $50,000 and led to 100 new users. Thus, our CPA comes out to:
Meaning, for every user who brings in $360 worth of revenue, it actually cost the company $500 ($140 more) to acquire them in the first place.
Ruh roh. Not good.
The Dilemma (And How To Solve It)
As you can see, CPA needs to be equal to or less than CLV for the business to be sustainable. If not, the company will cease to exist in the future.
So what to do? The only thing within our control is to lower CPA.
The great news is that if we can successfully lower CPA, then the CLV and CPA can “break even” (or ideally, come out in the positive) providing positive user growth and proving marketing really was worth it :]
Rather than trying to decrease the total marketing cost (CPA’s numerator), let’s attempt to increase our number of conversions (CPA’s denominator). After doing some customer research and mapping our customer journey, some ideas have bubbled up that are worth testing for our dog walking company:
- Offer a “money-back guarantee”
- Provide a “14-day free trial” (no credit card info needed)
- Optimize the “check out” process (ex. create a 2-step quick check out process, make sure there’s no unexpected costs tacked on at the end)
- Implement retargeting for prospects who “abandoned their carts” (proven to be a massive, missed opportunity for many companies)
- Create and nurture a local mailing list (averages a 3800% ROI with the lowest CPA compared to other channels) for the next 9 months (the incentive? The 14-day free trial)
- Activate conversion tracking in Google AdWords and Facebook Ad Manager (i.e. understand what keywords users used that lead to a product purchase, and launch a PPC campaign targeting those exact keywords)
The beauty of these ideas is that they not only apply to our dog walking company, but they’re actionable for your company as well.
Why not offer a “Lifelong Guarantee” where you remove all foreseeable worries for the customer?
Or, why not factor tax and shipping into the price so your customer is never surprised by fees at the end?
Ogilvy was right; as long as you’re listening and catering to your customers, the sky is the limit for testing ideas and marketing better.