Archive for the ‘Testing and Tracking’ Category

What’s A Customer Worth?

Monday, September 13th, 2010

If you are going to spend money to get new customers, it’s pretty important that you know what they are worth to you.

Do you know what a customer is worth to you?

There is a calculation called “lifetime value of a customer” that I’ve used extensively with consulting clients and in my own businesses to find this out.

Lifetime value of a customer tells you how much profit you earn from an average customer over their lifetime as a customer of your business.

This number is crucial in the direct marketing industry as it is extremely rare to acquire new customers at a profit or even breakeven – so we need to know what we can afford to pay to get a new customer.

If your average lifetime value of a customer was \$3,000, it would make sense to “buy” as many customers as you could if you could get them for \$300 wouldn’t it?

Well, this is how the direct marketing industry works, but it makes sense for every other industry too. Without this information you could be making some big mistakes.

Let’s say you ran a marketing campaign to get new customers and you made \$10,000 in sales but the campaign cost you \$15,000. You probably wouldn’t do it again because you’d consider this to be a failure, wouldn’t you?

But, what if that \$10,000 in sales came from 20 new customers? And, if your lifetime value of a customer was \$3,000, those 20 customers are worth \$60,000 to you in
profit and only cost you \$5,000 (\$250 each) to get!

That’s a huge success, not a failure!

You can see that not knowing this number for your business could cost you thousands of dollars of lost profits and cause you to make the wrong decision about your marketing and advertising programs.

I’ve had clients who stopped programs that were extremely profitable because they didn’t understand how to interpret the results. (the example just mentioned is one example)

Here’s how to calculate this important number for your company:

1. Divide your annual sales by your number of customers to get the average annual sales/customer

2. Multiply this by your average gross profit percentage to get the average annual gross profit/customer

3. Estimate how many years you retain an average customer. (You can calculate this if you know how many accounts you lose each year – divide that number into your total number of customers to get the number of years an average customer stays with you)

4. Multiply the profit in step 2 by the number of years in step 3 to get your estimated lifetime value of a customer.

If you have multiple product lines or services, you should have a different LVC for each. Some of your product lines or types of customers might be much more valuable than others and it pays to know.

When Is A Customer Really A Customer?

Friday, September 10th, 2010

That may seem like an obvious question, but the answer isn’t.

Though most companies consider a customer a customer once they have purchased from them, smart marketers know better.

In the direct marketing catalog industry, companies need to know all their numbers or they’ll go out of business in a hurry. Many of them have found they don’t even consider a customer a customer until they get the 2nd or 3rd order.

This is because many people will buy once and never again. What a smart business does once they know this is offer promotions, specials or premiums to make sure those customers order that critical second or third time.

Although they may have to spend significant money to get that second or third order, it will usually cost much less than it cost to get that first order. Turning a one time purchaser into a long time customer is usually well worth it.

What is your normal reorder cycle? If your customers normally buy every month, then after 3 months with no orders, consider the account lost. Whatever your normal order frequency multiply it by three to define what is a lost customer.

When I had my mail order catalog company, we ran reports every quarter to find out who didn’t buy that quarter and then we made them special promotional and offer to get them back. I considered them a lost account if we had no orders in 3 months.

Your business will have its own numbers, but not knowing them is costing you money.

Here’s another example I heard about lately. Expert marketers in the dry cleaning business have calculated that they needed to get someone to drive to their business 6 times to make them a solid customer in the future.

In essence, once you driven there 6 times, (3 times to drop off cleaning and 3 times to pick it up) your car drives itself to the cleaner without you thinking about it from then on…

Then they’ll keep you as a customer until they ruin something or otherwise mess up your order.

Using this knowledge, a new dry cleaner dominated his market quickly by offering amazing deals like clean anything for \$1 – no limit. People came from a long way
away to give him their cleaning. He ran three promotions like this – each one with a little bit less of a discount each time.

After a couple months he stopped the crazy promotions and had all the customers he could handle at his regular prices. He accomplished this for a lot less money and much quicker than he would have with a traditional advertising blitz.

By using his money to give his customers great deals instead of spending it on advertising, he effectively bought a lot of customers quickly.

The mail order catalog industry routinely does this too. Only rarely can a catalog company acquire new customers at a profit. Their profit comes from the future orders.

A few years ago, I was helping a client analyze a mail order catalog business acquisition and we included in the acquisition cost the cost to get another 250,000 customers
at a cost of \$6.00 each.

That \$1.5 Million was a real cost we’d incur to build their customer list to a large
enough size for the company we were buying to be a viable business so it was included in the analysis of the transaction.

Find out what these numbers are for your industry, and you’ll be a much more effective and profitable marketer.

What Does It Cost You To Get A New Customer?

Monday, September 6th, 2010

Do you know what it costs you to get a new customer? Not a lead, but an actual customer.

If you don’t know, you’re flying blind and probably wasting a lot of money or leaving a lot on the table.

Many clients I work with have some idea of what it costs them to get a lead but have no idea what it costs to get a customer. You can’t assume that your leads convert to a customer equally from all lead sources so you must track this.

Here’s a good example of how bad your decisions can be without tracking this carefully.

In the early 1990′s I founded an Internet business selling a business opportunity in the promotional products industry. I was basically putting people and businesses into the business as distributors for only \$1,000 while the franchises and others were charging \$20,000 or more.

Because my margins were a lot thinner than my competitors, I really had to watch my costs to acquire a customer from each source carefully. I had an advantage though – my business was strictly online and I’d create traffic to my web site and then people would read my sales letter and send me \$1,000 – sometimes without even talking to me.

I did like that aspect of it!

When I started advertising in the classified sections of national magazines to get traffic, I was using 12 different magazines.

My tracking told me that the leads I was getting from Entrepreneur Magazine were my most expensive leads and some other magazine whose title I’ve long since forgotten was bringing me leads at 1/5th the cost of Entrepreneur.

Had I looked only at lead cost, I would have naturally cut out my most expensive lead sources and put my money where my leads cost the least.

But, when I analyzed the cost to get a customer, not just a lead, Entrepreneur turned out to be my least expensive source of customers and that cheap lead source was the most expensive. Even with hundreds of cheap leads, NONE of them ever became customers!

Without proper tracking and analysis, I would have put more money into what wasn’t working and stopped doing what worked!

Do you know your cost per customer from every advertising method you use? If not, you are making decisions based on bad information. You spend money to get new business, so don’t blow it by not tracking the results properly!