Advertising Costs per Unit and your Profit Margins
Using cost to acquire each customer is the most efficient way to measure your overall advertising effectiveness and choose advertising methods for your start up company.
Different advertising costs will be justified based on your gross margins per sale in your company.
For example, Pennza Mobile Detailing’s advertising cost per customer is usually somewhere between $15 and $20.
This number is found by taking the amount of money spent on advertising in a give time frame divided by the number of new customers within that time frame. For example, if We spent $400 and acquired 20 new customers, our cost per customer acquisition is $400/20, or $20 per new customer. while if my publishing company’s customer acquisition cost was that high, I’d be homeless.
Pennza has the ability to spend this much per new customer because $100 is the least expensive package we offer and the $20 cost per customer acquisition still allows us to have a competitive profit margin.
The New Publishing company’s advertising campaign will have to be much different. At a price of $6 to $10 per magazine, spending $20 to acquire each customer is a luxury we will not be able to afford.
Some consultants let us know direct mail would be a good option for our advertising campaign. Here is a breakdown of the best case scenario for a direct mail campaign (per 100 letters sent out).
| Description | $ per unit | # Units | Total $ |
| Cost For Postage | $0.45 | 100 | $45.00 |
| Envelope | $0.02 | 100 | $2.00 |
| Paper | $0.02 | 100 | $2.00 |
| Printing | $0.04 | 100 | $4.00 |
| ——–
$49.00 |
|||
| % Responded | Revenue Per | Total Revenue | |
| 0.50% | $10.00 | $5.00 | |
| 1.00% | $10.00 | $10.00 | |
| 2.00% | $10.00 | $20.00 | |
| 3.00% | $10.00 | $30.00 | |
| 4.00% | $10.00 | $40.00 | |
| 5.00% | $10.00 | $50.00 | |
| 10.00% | $10.00 | $100.00 |
This simple financial projection is a recipe for disaster. The typical response rate of direct mail is from .5% to 2%. In the likely scenarios, you will lose money every time.
Please keep in mind that this is a very, very simple projection. We did not take costs into consideration for sales copy, scale for the amount of letters you will mail/other discounts, costs to buy or rent the list, and customer lifetime value. We also did not put in any costs for taking credit card orders or revenue for additional subscriptions for the magazine per each customer.
This simple example and explanation should show you just how important financial projections are. Just because a consultant suggests a direct mail campaign does not necessarily mean it is your best course of action.
You need to research your industry and create a detailed set of financial data and projections in Microsoft Excel or Google Spreadsheets. The financial data will help you build your marketing plan and operations plan for the business. Keep in mind that you should research average response rate and costs for each type of advertising you plan on using. For example, don’t assume email response rate will be 10% if you can find data online that average response rate is less than 1% (which is true).
Ultimately, we decided that direct mail and PPC campaigns (which we use for Pennza) would be too expensive per customer acquisition in the new publishing company. We have chosen to use social media (specifically Facebook and Twitter) as well as a weekly “questions and answers “newsletter to find potential customers and attract them to our publication. Although this will not allow us to grow as fast as direct mail might allow, it will help keep costs per customer acquisition low and will help us to create a profit before the end of the first year. Most magazines don’t turn a profit until 3 years in operations.
Best Regards,
Robert M. Cavezza (Bob)