Business Strategy

How to Profitably Buy Customers with Advertising

Brad Smith
October 21, 2011

Advertising is an investment.

But most small businesses don’t see it that way.

They fear wasting money and as a result miss out on a great opportunity.

Advertising is the quickest way to propel your business.

Online, you can measure the entire sales funnel and see where customers are coming from.

So you can easily determine the effectiveness of your advertising.

You just need to figure out these two important advertising metrics.

They will help you profitably buy customers through advertising.

The Two Important Advertising Metrics

The internet provides a great platform for low-cost, high yield marketing and advertising.

There are two metrics you need to figure out.

First, you need to determine what the customer’s lifetime value is.

This number depends on your business. But most people know that it’s far easier to keep an existing customer than find a new one. So figure out what each customer is worth over the average life of their purchasing, and you’ll be surprised.

Sometimes an easier metric to find is the cost of the one purchase you’re advertising. This is more straightforward and can help you when calculating the next step.

Second, you want to figure out how much it will cost to acquire each customer.

When you know how much your customers are worth, then you can figure out how much you can afford to advertise and still make a profit.

In order to illustrate, we’ll focus on Google Adwords.

Google Adwords provides a great, direct advertising opportunity for any business.

I’ve created a simple model that will help you determine how much a customer is worth, and how much we’ll need to spend. It’s not a formal sale forecast, but it gives us a quick estimate.

By changing the numbers in BLACK, the calculations in BLUE will immediately adjust, giving you an easy way to run simple scenarios. Please note that the calculations don’t factor in timing differences.


Customer Acquistion Model

When measuring, tracking and reporting customer acquisition, you’ll need to focus on several metrics.

Initially you’ll want to know the average Cost-Per-Click (CPC), and if that number is optimized (changes based on competitive pricing) or static (won’t change).

Then you will want to track your total cost-per-click for a given period of time (daily, weekly, monthly, etc.).

Now, focus on conversion rates, like conversion percentage, cost per conversion and the total conversion cost.

You can use a simple tool like this to quickly run a few scenarios and determine if your advertising will be profitable before spending a dime.

When you can figure out how to profitably buy customers through advertising, then there’s really no limit to your growth.