The Cust to Get a New Customer

You have to know what it costs to get a new customer. I’ve been accused of being a bit of a maniac when it comes to lead tracking and making sure that we know where everything is coming from. I was a bit of a tyrant about that in previous businesses that I had, because you have to know what’s producing and what’s not. Otherwise, you can waste enormous amounts of money.

David: Hi and welcome to the podcast. In today’s episode, cohost Jay McFarland and I will be discussing what it costs to get a new customer. Welcome, Jay.

Jay: Hey, it’s so good to be here, David. And this is a very important question that all companies need to ask. It’s almost as though it’s part of your cost of goods sold.

And if you don’t know this answer, you may think you’re making money and you might not be.

David: Yeah. It’s really funny when I ask audiences that question, if I’m in front of a group and I say, “What does it cost you to acquire a new customer?” I get some blank looks, I get some smiles, some nervous laughter, some looking around.

It’s generally a very small percentage of any given audience that actually has an answer to that question. And I think it’s interesting because if you don’t know this, or if you don’t even have an idea of what that cost might be, then you really have no idea not just what you’re putting out, what you’re getting from it, but you really have no idea how to continue to build from there.

And I think to the extent that I do get answers when I ask the question, a lot of it is just generalities. It’s like, “well, I spend a lot, Oh, it’s a lot, it costs a lot.” But what is it? And some people are like, “Well, I don’t spend anything because I get referrals.” And whenever someone tells me that, that tells me that they’re probably doing 10 to 25% of the business they could be doing.

Because if they’re getting a lot of referrals, that’s awesome. But if they’re just relying on referrals alone, there’s a lot that they’re leaving on the table.

Jay: Yeah, I think that’s a great point. If you don’t know what your customer acquisition cost is, you can’t impact it.

And it should be a goal to try and drive it down if you can. And if you can’t, work it into your sales costs, work it into your systems so that you can make sure that you’re profitable.

David: Yeah. I think something else that people often don’t think of, particularly small businesses, they may go to Chamber of Commerce functions, they may do different things, go to different networking events and that sort of thing.

And they don’t really think of that as a cost of getting customers. Because they don’t value their time enough in a lot of cases. And so even if you’re not putting out actual cash in the form of advertising, marketing, things to get you noticed like that, there are acquisition costs.

It’s going to cost you a certain amount of time out of your day. It’s going to cost you in terms of energy. It’s going to cost you in terms of effort. It’s going to cost you in terms of what could I be doing instead of what I’m doing now that could potentially produce a higher return? So there are a lot of different aspects to this and that’s why I thought it would be a good conversation to have.

Jay: Yeah, I do agree with that. And you’re mentioning all the different types of customer acquisition. I mean, it could be something that doesn’t cost a lot. Maybe you can make viral videos and that’s driving customers to you.

But there’s still an expense of creating those videos. There’s a lot of time and effort put into that, and they’re not calculating that in. They would probably tell you we don’t have a customer acquisition cost. But they’re paying somebody to spend 30, 40 hours a week to create viral videos.

That’s a cost.

David: Yeah. Or they’re doing it themselves, and if their time’s not worth anything, then they’re not spending money, but our time is worth something. Everybody’s time is worth something. And so those are the things that have to start going into the equation.

Also, I think a lot of times people don’t bother tracking to see what it is actually costing them in terms of time, energy, effort, and of course, money.

Now, if they are spending money to generate leads, maybe they spend a certain amount of money to whatever, buy or rent a list, or maybe they spend a certain amount of money on advertising. Maybe they’re doing Facebook ads, or YouTube ads, or billboards.

I mean, it could be anything, any sort of advertising, Newspaper advertising, obviously not as popular these days, online ads, lots of different ways that one can advertise to get their information in front of people.

So if you’re generating leads or clients on social media, there’s a definite cost associated with that in terms of how much time are you putting in while you’re online, even if you’re not spending money on ads themselves.

There is definitely a cost involved. So these are the types of things that it makes sense to sort of think about as you’re going in on a monthly basis, weekly basis, if not a daily basis.

Jay: Yeah, and I think actual individual tracking, I mean, maybe it’s even just a spreadsheet of each platform that you’re using, if you’re paying for Google AdWords. If you’re paying for boosting on Facebook or anything else. Track what you’re spending.

And then the other part of that, and I think this is where a lot of people miss, is when that lead comes in, it’s important to ask. It’s important to know, “Hey, how did you hear about us?” Because if you don’t do that, you’re not going to know what’s working and what’s not working.

David: Yeah, absolutely. You have to be able to track it on the back end once that happens. And once again, I think there are a lot of people who don’t do this. They’re just out doing a lot of different things, potentially. And if you don’t know the things that are actually generating the results, how do you know how you can improve?

Because it’s possible you could eliminate a number of different things that you’re doing that just aren’t producing as much. You could double down on the things that are working and you could generate a lot more customers in the same or less time.

Jay: Yeah. And the beauty is with at least digital products or social media products, it’s so easy to track where those leads came from.

If you have Google Analytics that will help you. Or we kind of talked about it last time, where you used to have an individual phone number for each type of advertising. Now you could just send them to a unique URL for each advertising vehicle and know instantly how many leads are coming through.

And then the next step would be, well, how many of those leads are we closing? Because that’s how you really calculate your cost of customer acquisition.

David: Yeah, and I think in a sense what you said, that’s the ideal. That’s exactly what everyone should be doing all the time. But even getting to that, if people were to do things as simple as pay attention to what it is that they’re putting out, pay attention to where those leads are coming from, even generally.

If someone contacts you, however it is they contact you and you’re not sure where they came from, just to ask them, “Hey, where did you hear about?”

Now, if they’re contacting you online, if they’re contacting you through Facebook Messenger or something like that, then that gives you a bit of a hint that they probably saw something that you posted on Facebook and they’re responding to that.

So you should be able to track it down a little bit that way as well. But without that information, you really have such a disadvantage over the people who are paying attention to those sort of things.

Jay: Yeah, and I don’t know about you, but I’ve been really surprised. You know, we make assumptions about what’s going to work. And of course, people selling us advertising products, they tell us how it’s going to work.

But when you do actual tracking, I’ve been really surprised. I’m like, Really? That was the one that I thought, that was just a shot in the dark. I didn’t think that was going to work at all. And that’s the one that’s really performing. So I’m going to dial that one up. And these other ones that I thought were going to perform, and they’re not, I’m going to dial those ones down.

I mean, this is how you improve the entire process. And it should be a constant process, right?

David: Yes. And that is absolutely the case. I know, I’ve been accused of being a bit of a maniac when it comes to lead tracking and making sure that we know where everything is coming from. I was a bit of a tyrant about that in previous businesses that I had.

I had a direct mail catalog business. And it’s absolutely critical in a business like that, because you have to know what’s producing and what’s not. Otherwise you can waste enormous amounts of money, and so that’s something that I’ve just carried over.

So even now, if I run ads. There are different types of ads that can be run through different organizations that’ll be doing email communications that can be coded and tracked to a specific page on a website, as you indicated.

So if they opt in from that page, you know that it came from this particular ad. It’s very easy to do. And as you indicated, sometimes you think this one thing’s going to be great, and it turns out that it’s not.

Sometimes you think it’s going to be great and it is. Sometimes you’re right. But what’s really interesting is sometimes you can have a lead source that will generate a lot of leads and you think, “Wow, this is great.” But then you find out that they’re not producing anything. They’re not converting into sales. So you can have fewer leads coming from one source that generates more revenue for you, more sales and more long-term customers.

And then you have something else that’s generating a lot of leads, but they’re just taking up your time, and they’re not converting.

Jay: Oh yeah. I’ve totally had this experience. We had set up Google advertising and instantly we were getting leads like you couldn’t believe. And we started going through ’em and spent a lot of time with them, and none of them were valuable. Our close rate was like, 1% on this group. And we’re like, “that is terrible. ”

So we refined the keywords. We did a lot of research and we were able to crank the close rate up to about 28%. And that’s just by watching and learning and you know, figuring out what works best.

But it’s still a constant process. We’re still looking every day at that rate. And it will start to fluctuate sometimes. And we’re like, Okay, what’s going on? Is there an industry shift here? Are the needs of customers changing because of trends that we’re not seeing? It’s just a constant labor that we go through.

David: What’s really interesting about that, is the idea that you can engage in an activity that will create a 28 x return, right?

We were getting 1%, now we’re getting 28%. That’s 28 times…

Jay: I know!

David: …the result, right? And assuming, all things being equal, which of course they never are, but I mean that could mean a 28 x increase in overall gross sales. And the more you dial it in, the better it gets. But many people fail to even think of that sort of thing, let alone take consistent action on it.

Jay: Yeah. And the incredible thing is that we’re actually spending less money to get those leads. Because we got the system so refined. So we reduced our cost of customer acquisition and we improved our close rate at the same time.

I mean, we were just jumping for joy when we figured out this equation. Now, not everybody is that simple. I’m in an industry where there’s a very specific type of customer and we were able to hone in and identify that individual. Not so easy in every industry, though.

David: Right, but just the idea that that can be done. A lot of times what’ll happen is when people are running an ad or they’re doing some sort of outbound effort, if it doesn’t produce results, if you talk to a hundred people and you’re only able to close one, if you get a 1% closing rate. You may look at that and say, Oh, well this doesn’t work.

And those three words, “this doesn’t work,” are deadly in marketing and sales. Because too often we blame the one thing, whether it’s the ad or whether it’s the medium that you’re using. If it’s Facebook or if it’s Google or whatever, you say, “Well, that doesn’t work.”

“Facebook ads don’t work.” In the work that I do with promotional products distributors, there are customers for promotional product salespeople who say, “Well, promotional products don’t work for us.” And you can’t really just come out and say this, “Well, it’s your fault.” But it’s the truth.

You can’t have an entire advertising medium that produces results for a whole lot of other people. That, for some magical reason, doesn’t work for you. It’s always a matter of saying, “okay, could this work? What can I do to tweak this? What can I do to make this work?” And you try some different things.

It’s like the old story about Edison and how when he was asked about his many failures when trying to create the light bulb, or “you’ve tried 10,000 different things, they’ve all failed.”

He said, “No. I’ve successfully identified 10,000 approaches that don’t work.” And then eventually he identified one that did. And that’s the reason you’re doing it. You’re not doing it for the failed experiments, you’re doing it for the one that actually ends up creating results.

Jay: Yeah. Such a great point. And I do think it’s also important to talk about the closing process because you may have a great system that is actually generating good leads. But you don’t have the right closer, the right person on the other end, the right system on your website to actually get them to finally click that purchase button.

So you may have actually a good system of generating leads of good customers. But then you’re falling down on the closing side. So there’s a lot of different aspects to this process that need to be looked at.

David: Yeah, it’s true. There are lots of different places along the line where things can potentially go wrong. And the most important, or one of the most important aspects of this, is identifying that correctly. And not just saying, “Okay, it’s this,” when you haven’t actually determined that it is in fact that.

Jay: Yeah, not guessing, right? Using key performance indicators, all of the information that’s available out there to make the best decisions about where you are falling down.

David: Yeah. So I think for most people who haven’t really thought about this, take just a little bit of time, jot down a few notes in terms of, okay, what am I doing right now that is working well and how can I leverage that? How can I amplify that? What am I currently spending? In terms of money, in terms of time, in terms of energy and effort? If there are particular activities that you’re engaged in that just drain you and cause you to lose enormous amounts of time because you just can’t stand it and the rest of your day goes away, notice those types of things.

But then also just look at those costs and identify what they’re likely to produce. And again, it doesn’t take a whole lot to be able to do this. But if you just pay attention to where those leads are coming from and which leads are closing, and you can literally do this anywhere.

I get a lot of questions about this. Well, do I have to have a contact management system that I put this in? That’s ideal. You want to have a place to store all the information, have it all there so that you’re not looking around for different scraps in different places. So it’s good to have it all in one place, but within a customer record, you can identify this, Where did they first hear about us?

And so if it takes three months or six months or a year to get them closed, hopefully it doesn’t take that long. But if it does, you can still go back and say, Oh, okay, this lead came from this particular source.

So it just allows you to know. Because when you have some idea of where your existing customers are coming from, then you also have some idea of where to go to get more.

Jay: Absolutely. Such great information. How do people find out more?

David: Well, you can go to, schedule a call with myself or my team. We can work through whatever it is that you’re currently dealing with, where you are now, where you’d like to be, and see if we can help you. And if we can, we’ll let you know. If we can’t, we’ll let you know that, too.

Jay: All right, David, thank you so much for your time today.

David: Thank you, Jay.

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