You will be able to set an affordable cost per result from your own margins and customer value.
Farah's ad report said each sale cost S$48. Was that good? She had no idea. A friend selling skincare paid more and called it cheap. Another friend selling phone cases paid less and said she was losing money. Neither number meant anything to Farah, because she had never worked out what a sale was worth to her own shop.
Every decision in this module, from how much to spend to which bid strategy to choose, depends on that one figure. Without it, a cost per result is just a number on a screen. With it, you can tell at a glance which side of the line a campaign sits on.
Start with the simplest version, the profit from one typical first purchase. You get it by multiplying the average amount a new customer spends on their first order by your margin, which is the share left after the direct costs of that order. For an online shop those costs are the product, packaging, delivery and payment fees, while for a service they are mostly staff time and materials.
Here are Farah's figures, all examples. Her average first order is S$120. After the cost of the clothes, delivery and payment fees, about 45 percent is left. So one first order brings her S$120 times 0.45, which is S$54 of profit.
That S$54 is her break-even cost per first sale. If she pays S$54 in ads to win an order, the order pays for its own advertising and leaves nothing over. Pay less and she profits on the first order. Pay more and she loses money on it.
So her S$48 cost per sale left a thin S$6 profit on the first order, which was better than her friends' comments had made her fear but left very little room for a bad week.
If customers come back, the first order understates what a customer is worth. Digital marketing foundations: strategy before tactics works through this in lesson 6.3, What a customer is worth and what you can pay for one, as lifetime value: the profit a typical customer brings over the whole time they buy from you. If you need a refresher on the method, go back to that lesson.
The same lesson worked out figures for Priya's maths centre in Tampines: a student paying S$300 a month for about three years, at a margin of about 40 percent, brings about S$4,320 in profit over that time. For Mei Ling's cakes, at about S$80 a cake, two orders a year for about three years and a 35 percent margin, a customer is worth about S$168. Every figure in these sums is an example, and yours will differ.
For Farah, using her own order history as an example, a new customer places about 2.5 orders in total over the time she keeps buying. At S$54 profit each, that is S$135 over a customer's life.
Now you have two numbers for each business: profit on the first sale and profit over time. The most you can pay to win a customer sits somewhere between them, and where depends on your cash and your confidence.
Paying up to the first-sale profit is safe, because every customer pays back immediately. Paying up to the lifetime figure is risky, because the money comes back over months or years, some customers leave early, and the estimate may be optimistic. Lesson 6.3 of Digital marketing foundations suggested a cushion below lifetime value, and Priya chose to pay up to S$300 per new student, a little less than the S$360 profit on a first term.
Notice what this does to the comfortable number. A S$300 cost per student feels shocking next to a S$300 monthly fee. Measured against what a student is worth, it is reasonable. The reverse happens too. Mei Ling might feel fine about paying S$40 to win a cake order. Against S$28 of profit on a first cake, that loses money on the first order, and she only recovers it if the customer comes back more than once.
Write your maximum down with the reason for it. It becomes the target in lesson 8.2, Bid strategies: manual, automated and targets.
Farah's ads lead straight to a sale, but many businesses sell in two steps. Priya's ads bring trial class bookings and only some of those families enrol, while Mei Ling's ads bring conversations and only some of those turn into orders. Both of them need a target for the lead as well as for the customer.
The sum is your maximum cost per customer multiplied by your close rate, the share of leads that become customers. If one in three of Priya's trial bookings becomes an enrolment, her maximum cost per booking is S$300 times one third, which is S$100. If one in four of Mei Ling's conversations becomes an order, her break-even cost per conversation on a first cake is S$28 times one quarter, which is S$7. Both close rates are examples; use your own records.
That last figure is sobering, and useful. It tells Mei Ling that paid ads for one-off cakes only work if her ads are cheap, her conversations convert well or her customers return.
In the activity below you will calculate your own break-even cost per customer and cost per lead from your margins and close rate.
Calculate your break-even cost per customer and cost per lead from your own margins and close rate.
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