We start with a paid search marketing program. The marketer spends $10,000 and observes these results.
| Profit And Loss Statement | |
| Clicks | 20,000 |
| Conversion Rate | 1.00% |
| Customers | 200 |
| Average Spend | $125.00 |
| Demand | $25,000 |
| Net Sales (80%) | $20,000 |
| Gross Margin (55%) | $11,000 |
| Less Marketing Cost | $10,000 |
| Less Pick/Pack/Ship (12%) | $2,400 |
| Variable Profit | ($1,400) |
| Cost Per Click | $0.50 |
| Cost Per New Customer | $50.00 |
| Profit Per New Customer | ($7.00) |
There are two metrics that we commonly look at ... cost per click ($0.50), and CPA, or Cost per New Customer ($50.00).
In this case, the marketer is spending $50.00 to acquire a new customer.
The metric that really matters is profit per new customer (PPNC).
In this example, the brand loses $7.00 profit for every new customer.
Next, the brand compares this metric with the long-term value of the customer. For instance, this segment of customers might generate $15.00 profit in the next twelve months.
In total, the marketing activity is responsible for (-$7.00 + $15.00) = $8.00 profit, over a twelve month period of time.
Where possible, we want to evaluate profit per new customer (PPNC), instead of easier-to-compute metrics like cost per click or cost per new customer.
Hello Kevin,
ReplyDeleteI've tried to understand relations between your statement items, but I'm not sure I got it right. I rewrote this comment twice, because firstly I described the way I had used the variables and formulas; but after looking at it for a longer time, I realized I didn't catch it at all!
Could you, please, write the input variables, and formulas you use to compute each number? Or maybe you can attach simple Excel file if it is easier for you. That would be great, since I feel the way you look at these metrics is very reasonable.
Thank you for your reply
Pavel Jasek
Let's go through the steps, one by one.
ReplyDeleteDemand = Customers * Average Spend, = 200 * $125 = $25,000.
Net Sales = What the customer purchased - the merchandise not available - merchandise returned. This is usually expressed as a percentage of demand. $25,000 * 0.8 = $20,000.
Gross Margin = Net Sales - Cost of Goods Sold, usually expressed as a percentage of Net Sales. In this case, it is 55% of $20,000 = $11,000.
Marketing Cost = Clicks * Cost Per Click = $20,000 * 0.50 = $10,000.
Pick/Pack/Ship Expense = The cost to pick the items off the shelf at the distribution center, pack the box, then ship it to the customer (less what the customer paid for shipping). This metric is usually expressed as a percentage of net sales, in this case, 12% of net sales, or $20,000 * 0.12 = $2,400.
Variable Profit = Profit before overhead (i.e. salaries, buildings, etc.). This metric is calculated as Gross Margin - Marketing Cost - Pick/Pack/Ship Expense, or $11,000 - $10,000 - $2,400 = ($1,400).
Cost Per Click, restated = Marketing Cost / Clicks = $10,000 / 20,000 = $0.50.
Cost Per New Customer = Marketing Cost / Customers = $10,000 / 200 = $50.00.
Profit Per New Customer = Variable Profit / Customers = ($1,400) / 200 = ($7.00).
I did not talk about the lifetime value or long-term value metric. Some companies calculate this information, most do not. In this case, I assumed $15.00 of long-term profit only for this example. For each company that calculates this metric, the value is different.
I hope this helps!