The answer to this question will vary from retailer to retailer depending on their particular situation. Generally speaking, if your average transaction value and margins are generally low, then you’ll most likely want to keep your acquisition cost low too. If you sell higher ticket items with greater margins, then you may be able to afford to spend much more.
Major retailers, particularly those with online shopping channels, have built acquisition systems through Loyalty Programs and newsletters, and also add transaction history to their customers’ records. Aside from helping them determine a customer’s value to them, the intelligence gained from these systems helps to cost effectively target customers with relevant offers to increase the frequency of their purchases and prolong their relationships.
For many small or independent retailers this may be quite difficult because they haven’t built a database nor have Customer Relationship Management (CRM) systems in place to help calculate their customer’s value.
The best way to determine what acquisition cost you can afford is to firstly have a clear understanding of:
• Customer Lifetime Value (CLV)
• Average Transaction Value (ATV)
• Marketing Cost of Sale (MCOS)
CLV is simply calculating the amount of profit a customer provides you over the lifetime of your relationship with them: CLV = (avg. Profit / purchase) X (# of annual purchases) X (years a customer buys from you).
Calculating ATV can be relatively simple – just divide last year’s total sales value by the number of sales made. Once you’ve determined the average transaction value, you can determine how much of that transaction you can afford to invest in making that sale – your Marketing Cost of Sale.
MCOS is usually a percentage you’ve attributed to the cost of making a sale. Most businesses simply calculate their MCOS by dividing the total cost of their marketing efforts by the total sales value related to the marketing spend. As an example, if you’ve spent $100,000 in total marketing costs (staffing, advertising etc.) and you’ve achieved $800,000 in sales; your MCOS is 12.5%. If your MCOS is 12.5%, and your ATV is $100, then your MCOS is $12.50.
Once you understand your MCOS, you’ll be able to calculate what you should pay for a customer’s email address and other information. You can do this with a little ‘reverse engineering’ by calculating the average response rates (or anticipated response rates) you achieve in your email campaigns to customers, as demonstrated below:
Email Campaign Costs – Avg. CLV
Creative execution (portion per campaign) $250
Email deployment cost (.005 / record) $25
Marketing Staff (labour portion per campaign) $50
Database Costs (portion per campaign) $50
Campaign Cost $375
Email Campaign Activity
Emails Deployed 5,000
Net Response rate 1%
Average Transaction Value $75
Total Sales Value $3,750
Marketing Cost per Sale $7.50
Marketing Cost per Sale % 10%
Calculating Email Address Acquisition Cost
MCOS% Budget 12.5%
Budget% less Actual % 2.5%
Dollar Value (MCOS Budget less Actual) $93.75
Email cost for email records per campaign $0.01875
Campaigns per annum/record 12
Acquisition cost / email record / annum $0.225
Average Customer Lifetime (yrs) 3
Acquisition cost / email record $0.675
This example is simply to help you with a process to determine what you can afford to spend to acquire a customer’s email address. Naturally, each retailer will have different costs and values associated with the Campaign Cost, Transaction Values and Customer Lifetime. You’ll need to make the necessary adjustments as they relate to your particular situation to determine what you can afford in acquisition costs per record.
Every day, more and more consumers are using online mediums to find what they want. By their behaviour they are showing us other ways that they would like to be engaged. It is imperative that you know what you can spend on lead acquisitions and do a bit of testing to ensure you have struck upon the right balance between what you give and what you get.