What's Your Cost Per Prospect and Cost Per Customers

Business owners tend to measure success by looking at the bottom line. Is their revenue growing? Are they profitable? There’s no denying those numbers are crucial, but there are some other statistics every owner should track. Two important ones you may be overlooking are cost per prospect and cost per customer.

Cost per prospect will tell you how much you’ve spent — or want to spend — to get a prospect in the door. It’s a measurement of the marketing campaigns that you launch, your ads, your sales effort, your yellow page ads and your direct mail efforts. Each needs to be measured and quantified. That’s how you know whether or not they are effective.

To do so, you must determine a way that you can pinpoint how each prospect and customer finds a way to your business. If you’re not doing that now, you’re making a big mistake, because you have no idea if your marketing is successful.

Cost per customer gives you a number on how much it costs you to acquire a paying client, not just a prospect. If your marketing is successful, it brings you prospects. It’s one thing to get prospects or leads, but unless you convert some of them into customers, how many prospects you attract is meaningless. If you’re not able to convert these prospects into customers, there might be a sales problem or a marketing problem. Maybe your sales process — from the point where you first have contact with a prospect to when you close a deal — needs work. Or, if you are marketing incorrectly, you could be attracting prospects that aren’t really qualified to buy your product or services. Whatever the case, it helps to be able to look at both of these numbers.

Quantifying your cost per prospect and cost per customer will also help guide you in making overall marketing strategy decisions. After all, it doesn’t make sense to invest in a marketing campaign with a projected cost per prospect of $100 when another will cost only $65 per prospect. But in order to make the right decision, you need to calculate the right numbers.

The formula for measuring the cost per prospect is very simple. For each campaign (perhaps you have a newspaper or advertising campaign, do Internet advertising, buy billboard space, whatever) simply divide the total cost of the campaign by the number of inquiries you receive from that specific campaign. The time frame would be from when the campaign begins to when it ends. Now you know the average cost per prospect for each, and can ascertain which campaigns have been the most successful. (Separately, you may want to also figure an overall cost per prospect for your total marketing budget and include the cost of your sales staff compensation and the cost to produce your advertising and marketing.)

Key to coming up with a cost per prospect, of course, is accurately tracking where your prospect inquiries come from. This is the hardest part. Responses to Internet ads are fairly easy to track. When you send out written materials that are returned, like postcards or e-mail messages, code them so you know where the responses came from. When inquiries come from telephone calls or when prospects just stop by your office or place of business, make sure your sales staff and order takers get this crucial piece of information: Where did you hear about us? All forms of inquiry need to be identified.

To get your cost-per-customer figure, take the total cost of the ads and other marketing efforts and divide by the number of customers you have attracted. You can compare this cost with your average sales or revenue per customer, as well as your average net income per customer, to give you an idea of whether your marketing costs are appropriate for your average sales figure.

When you’re talking to advertising representatives, they will discuss cost per exposure, or their circulation or listening audience. While these figures will give you a sense of the media’s reach, ultimately the figure you need to pay attention to is your own cost per prospect or cost per customer, because then you have moved into actually measuring the success of your campaigns.

One factor that is difficult to measure, but that you should take into account, is longer-term brand awareness marketing. Experts agree that it’s important to build brand awareness of your product or service over time. To some extent, a sale you make today may be, in part, the result of an advertising campaign that built an awareness of your company two years ago. That’s because the ad your customer saw yesterday would not have prompted her to call unless she already was aware of your business from previous exposure. It’s tough to figure this into your cost-per-prospect figure and your cost-per-customer statistic, but you should keep in mind the value of long-term marketing campaigns that is not being tracked in your numbers.

Once you have these “cost-per” figures in hand for your different marketing campaigns, you’re in a better position to judge which marketing efforts are really paying off for you. Over time, these figures will also give you a sense of whether or not an ad that has worked well in the past is beginning to fail and might need changing. After all, you can’t fix what you can’t measure.