January 10, 2008

Profit Per New Customer (PPNC)

One of the least utilized metrics in the online, e-mail and catalog world is "profit per new customer", or "PPNC".

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.

Business Principle #2