Do you know the “value” of your customer? What they cost to get and what you will earn from them after acquiring them? It is a tricky game but one that could make a big difference in your financial outcome.
As marketers get wiser and the markets continue to evolve this could be the difference between making a profit or going bust. Here are some key steps to find the value of each customer.
How much does it cost for you to make a sale? If you are using Google Adwords this is very easy to track by reviewing your total advertising cost and dividing that by your number of sales.
Example: You get 200 clicks to your sales page. Each click costs you $.50 so your total advertising cost would be $100. If you made 6 sales then divide $100 by 6 or $16.67.
You make 6 sales from those 200 clicks to your sales page. 6/200 = 3% conversion rate. Not too difficult right? But a lot of people don’t do this and believe me, conversion rate is everything… as you will see below.
Cost Per Customer:
In this scenario, what does each customer cost you to acquire? Answer: $16.67. Advertising cost divided by number of sales equals cost per customer.
Example: $100/6 = $16.67 per customer.
How much should/ can you charge for your product? It all depends if you have a “backend” product funnel set up or not. That is a topic for another day and that would effect this scenario significantly. But lets assume for now that you do not have a backend product funnel and this is a stand alone product.
A very popular price point is $47 so lets go with that for this example:
If you processed the payment through PayPal your transactions cost on a $47 product (as of this writing) would be $1.66 per transaction.
So your net profit would be $47 – $16.67 – $1.66 = $28.67 per sale.
Depending on your conversion rate, this could be a profitable product if all this remained the same. But lets assume you split tested your sales page and increased your conversion rate to 4% rather than 3%.
What would that additional 1% do for your profit?
Well, a 4% conversion on 200 clicks is 8 sales. So now you are looking at a much more profitable scenario.
Your advertising costs remain the same: $100.
Your cost per sale went down: $100/8= $12.5 per customer
Your profit per sale went up: $47 – $12.5 – $1.66 = $32.84 per sale.
This is why successful marketers split test and split test and split test. The higher your conversion rate the more you profit or the more you can afford to spend to get the customers.
It is very important to know and track your cost per customer and your conversion rate. This will show you the value of each customer and will ultimately determine how successful your are in your online business.