Just how much does a new customer cost you?

Absolutely right -- except the "cost per card" as he was using it is practically meaningless. It certainly wasn't the same as the cost per active card. And as the revenue from the new, active cardholders had to carry not only their own costs but the total cost of all the prospects to whom cards were sent and promotion directed but who never activated their cards, this cost was far in excess of his low figure. It turned out that not only did the company not have a fix on what it was really paying for an active cardholder; it didn't know how much it could afford to pay.

Determining the amount you can afford to pay for a sale, a customer or a CRM initiative (the allowable cost per order or ACPO) is the most important equation in marketing today. Pay more and it eats into your profit: pay less than the allowable and the difference drops directly to the bottom line. It's not an easy number to figure out but it is essential to planning for profit, which is, after all the bottom line.

There are some guidelines that are useful. The first is that you must always start from a micro view -- a single customer or prospect -- rather than a macro view -- the percentage of revenue. Each customer is different and even though we naturally aggregate him or her into a group, our 'construct' has to be from the bottom up rather than top down.

The next hurdle is estimating revenue. If we are simply calculating the allowable amount we can spend for marketing to generate a sale, it's easy: what will be the revenue from the sale? But when we are looking to acquire a customer we need to conservatively project the discounted customer revenue over time.

Here it is a good idea to include a discounting factor for the "unknown" future and the further into the future, the larger the discount for the unknown. Say you are projecting the second year's revenue and the third's. It is advisable to discount the assumption by perhaps 15% for the second year, 25% for the third. If we could predict the future with accuracy we’d all be certainly famous and probably rich. Since we can not, discounting natural optimism is no bad idea.

Against the revenue we have to look at all the costs, product or service, fulfillment, cost of money, incentives, etc. These are relatively easy to calculate. Less obvious but no less important are the indirect costs of overhead and/or contribution to profit.

If the purpose of the marketing effort is to generate revenue and profit, the amount we can afford to spend to stimulate a sale or acquire a customer must be the revenue less the amount left after all costs and the mandated profit and/or contribution to overhead. If we haven't taken profit and overhead as a cost before deciding how much we can afford for marketing, we have left out the single most important "cost" and are in danger of spending too much for marketing with the result that we could wipe out the profit.

ACPO methodology demands a very careful assessment of each step in the marketing process and considerable hard work to accurately project revenues and costs for relatively small prospect segments before aggregating them into a total plan. The results add up to considerably greater flexibility in marketing planning and more often than not, measurably high returns on the marketing investment.

Peter J Rosenwald is author of 'Accountable Marketing: The Economics of Data-Driven Marketing' and a founding partner in Consult Partners, London and Sao Paolo, a strategic marketing consultancy.

For more on Peter J Rosenwald's book see the book's website and Brand Republic's review.

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