March 14, 2016

Profit per New Customer

Ok, you have your "war room" plastered with five years of customer acquisition history, right? You publish all of your customer acquisition metrics from all sources on the wall in your "war room", don't you?

On the walls, you have key metrics you share with your company, by source of acquisition.
  1. Total Demand Generated by Year.
  2. Ad Dollars Spent by Year.
  3. Total New Customers, by Year.
  4. Total Profit, by Year.
And then, you have these important metrics:
  1. Marketing Cost per New Customer (Total Ad Dollars / Total New Customers).
  2. Profit per New Customer (Total Profit / Total New Customers).
  3. Year 1 Profit per New Customer.
  4. Year 2 Profit per New Customer.
  5. Year 3 Profit per New Customer.
  6. Year 4 Profit per New Customer.
  7. Year 5 Profit per New Customer.
You are probably saying to yourself, "Hey, idiot, when we acquire a customer from a new source, we don't know anything about years one through five." True. But it is your job to estimate those figures. That's what you are being paid to do. So make a guess, based on what you see with other sources of acquisition.

Compare profit per new customer at the point of acquisition with profit in year one. Do you lose twelve dollars of profit acquiring the customer, and then make twenty dollars of profit in year one? Yes? Then it might be a good idea to acquire that customer, right?

Sit down with your CFO and share your data - heck, it's posted on the walls of your "war room", so just invite her in to take a look. Ask her how deep she is willing to invest in a new customer ... you might be surprised to learn that she is willing to lose money for up to three years in order to grow the business. Or, you might learn about the financial distress your company must deal with ... and that's the reason you can only prospect to break-even.

The key, of course, is to use profit per new customer as the driving metric in this analysis. Don't use marketing cost per new customer, as that metric does not cleanly align with future profit (yes, if you do the math, there is 100% correlation between profit per new customer and marketing cost per new customer, but most people don't do the math to learn the relationship, you included, so just use profit per new customer).

Make sense?