Author’s note: a significantly shorter version of this post ran on MediaPost.com today, so read on…
CPA (Cost Per Acquisition) is a monster. In slavish devotion, 41% of businesses consider CPA their top metric (according to recent DMA study) thus making ill-advised marketing decisions that further nourish the CPA beast. Fiendish is an understatement when you consider the hypnotic power of CPA. After all, who wouldn’t, on first blush, want to determine how much it costs to acquire customers and then figure out how to minimize these costs?
Before providing proof to this thesis and suggesting an alternative metric, let me stop and pay homage to the monster’s creator. Thanks a lot Google. Before your arrival, businesses had a somewhat vague notion of what it cost to acquire a customer and even if they could make these calculations, it often took weeks or months. Now the smallest of businesses can spend a dollar via Google and just about instantaneously know if that dollar resulted in a sale.
But herein lies the true villainy. Because CPA is so easy to calculate, especially in the case of digital media spending, business leaders have become obsessed with this number and critical decisions are made in an effort to achieve the lowest possible CPA. This seeming no-brainer for marketing then wreaks havoc across the organization as complaints, returns and churn rates rise while lifetime customer value averages drop.
CPA is Destroying Businesses
Lest you think I’m being melodramatic, let me provide two representative real world examples with the names changed to protect the innocent. Company A is a tech company that when it first launched a decade ago had a game changing value proposition that helped them acquire several million customers who heaped praise on their service and served as willing brand evangelists. But in the last 2-3 years, their competitive advantage slipped and the market stopped growing.
At weekly staff meetings, “new customers acquired” was the predominant metric determining not just the mood in the room but the actions for the subsequent week. If one media type or promotional program was achieving a lower CPA than another, then dollars were shifted accordingly. Meanwhile, the weekly lost customer count was completely ignored even if it exceeded the newly acquired figure that particular period.
So now we get closer to the real problem with a CPA obsession. Company A drove down its CPA by running price promotions that attracted “switchers,” those savvy seekers of special deals who abandon ship once a better deal comes along. These folks were also the first to complain, sucking up expensive customer service time, driving down sentiment on social channels and depressing employee morale. This particular case does not have a happy ending so let’s move on to Company B.
Company B is a young digital services company that is growing leaps and bounds thanks to a ferocious sales culture. Dialing for dollars, the sales team calls upon prospects, offering their services with one solitary goal—close the sale. Management and marketing are all aligned behind this singular obsession, rewarding top sellers for their efforts and spending marketing dollars on lead generation that results in the highest close rate. And though this goes well beyond CPA as a metric, the menace is parallel.
For Company B, the trouble emerged online as their reputation began to suffer. Complaints about the ineffectiveness of their services bubbled up on organic Google searches as hundreds of newly acquired customers ranted on Yelp and other social channels. Undaunted, Company B hired a reputation consultant hoping to drown out the negativity online rather than address the fundamental problem—as an organization, they were focused on the wrong metric (sales closed) leading to the acquisition of a consistent percentage of customers they couldn’t satisfy.
It’s Time for a New Metric: Cost Per Satisfied Customer
Here’s a fundamental truth: what you measure defines your organization. Company A’s fanatical focus on short-term CPA meant ignoring churn, creating a customer service nightmare and diverting resources from new product development to fill the pipeline. Company B’s dedication to acquiring any and all new customers as quickly as possible spawned a reputation problem that still dogs them to this day.
Having established the villainy of CPA, we can now turn our attention to a radically new yet simple metric solution: Cost per Satisfied Customer or CSPC (because an acronym is essential here!). In this calculation, we seek to differentiate between all customers acquired and those that are actually satisfied with your product or service. By isolating the characteristics of your happy customers and how you came to acquire them, you can then replicate this in future acquisition efforts.
Practically speaking, this is a bit more complicated than I make it sound but fortunately in the world of big data, not beyond the reach of most companies. The key is the willingness to recognize the problem (not all customers are of equal value and some are even of negative value) and the solution requires more than changes in media buying and data monitoring, including an entire organizational shift from gaining customers to satisfying them on an epic scale.
For Company A, calculating Cost Per Satisfied Customer is not a stretch since their CRM system already tracks means of acquisition and length of service. These two data points alone can root out the “switchers” who can then be further profiled against the rest of the customer base acquired in a similar timeframe, allowing for the isolation of problematic promotions and preferred prospect characteristics. This data could deliver a rudimentary CPSC by dividing the marketing spend by the total of non-switchers acquired.
For Company B, getting to Cost Per Satisfied Customer is also doable. First they would need to look at their customer satisfaction data and isolate both promoters and detractors. Then they would need to model both groups looking for trends in terms of how they were acquired (lead source, sales person, pitch process) and business characteristics (size, ownership structure, vertical, location, years in business, etc.). With this info in hand, it would then be possible to concentrate sales efforts on those types of prospects most likely to be satisfied and divide the costs of these efforts by the number of promoters acquired.
A slightly more sophisticated CPSC calculation requires the ability to bring together marketing spend (M), customer satisfaction data in the form of total satisfied customers (SC) and lifetime customer value (LTV). The formula looks like this: M ÷ (SC x LTV) = CPSC. And I have no doubt that data geeks out there could refine this more by factoring in the additional costs of servicing unhappy customers as well as a reputational quotient that blends in recruitment and retention savings when complaints decline.
Here’s the bottom line—Cost Per Acquisition is the wrong bottom line and leads to organizational problems that can indeed be disastrous. All customers are not equal; some can help you grow and others might just put you out of business. By focusing on Cost Per Satisfied Customer, you can shift marketing/promotional/sales efforts towards those programs that deliver customers you actually want today and for the long haul, thus extinguishing the CPA monster once and for all.