The business was an online jewellery retailer, with a strong business brand and a high margin business but it was struggling to make money. As we pulled through the financial statements, it became clear that the cost of acquisition for a customer (marketing, promotion, referral commissions, brand ambassador and marketing production) was substantially greater than similar businesses.
We asked our client what their margin was on gross sales, their response was I buy for $1 and sell for $40, so I am making great margins. On these figures we could see that this should be a highly profitable business.
So what has been going wrong?
The repeat business for the customers was minimal (as these are one off purchases) so each customer interaction was a new one. The information provided indicated that for each customer it was costing $55, or shifting the gross margin from $39 in profit to a $16 loss on each sale.
So what could be done to manage this?
The prospect of repeat business was something that the owner was not focusing on, when marketing was directed at these customers they were buying, with a minimal margin cost.
The marketing mix was altered to focus on lower cost mechanism, this included reducing the focus on brand ambassadors and referral commissions. The cost per acquisition was limited to $15 per sale.
Analytics were the key
The business had not looked at the cost of acquisition prior to the engagement of marketing and this meant the marketing, whilst successful in terms of number of new customers, was not cost effective and resulted in the business losing money.
Using the data available through the bookkeeping system we could quickly extract the necessary data to show the position of the business in terms of the marketing cost. Understanding what the figures are telling you makes marketing more effective, if the cost per acquisition is eating into your business profits then your changes need to be made.
Taking an active step in comparing your bookkeeping figures with your marketing ensures that you are in control of your cost of acquiring a client. Give us a call if you are looking for guidance on active business analysis.