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« February 2005 | Main | April 2005 »
Acquisition vs. Retention. I’ve go to keep saying this. Chances are you lose money on every new customer. We all know that it is a certain few that are profitable enough to cover the costs of all the losers. Who are they? What do they look like? Can you make sure you hang on to them? How about targeting some of the losers with similar characteristics early in the relationship to move a higher percentage into the profitable side of the equation?
Customer Margin.
How do you increase your customer margin? Couple of ways. First is to consider customer share of wallet. Are you getting all the Pizza Business from that customer? Can you entice them to spend more per order? What about their non-pizza eating? What about non-evening eating? McDonalds of course taught us all that lesson very well when they introduced breakfast into what had traditionally been a lunch place.
Disney has been highlighted in several cases including the great book: Managing Customers as Investments by Gupta & Lehmann. Disney realized that although they were getting lots of people to the parks, they were only getting a fraction of the spend. The answer: open their own hotels and restaurants. Genius.
It’s going to be interesting to follow Starbucks entry into the music business. Do they need to be as big a Virgin in music? Of course not, they just have to show increased margin per customer.
Same with Apple. Asking some simple questions like: What is a computer? Or What is Software? opened them up to a great new world where they enjoy the highest margin per customer in the business.
What about you? Do you know your share?
Profit or Margin. Let’s admit it. We all pretty much measure profit by product or service. The large extra pepperoni is more profitable than the medium cheese. Ouch.
We know this is wrong. But we have been brainwashed into thinking that marketing is about products. The truth is profitability needs to be measured by customer. Which customers are the most profitable? How do you calculate that?
Sort customers by revenue, subtract all costs and calculate the delta between and you have your number.
Pizza example:
Johnson family spent $10,000 on Pizza last year. They order every week, but they call in, they live on the outer edge of our delivery area, they always use a coupon and they never know what they want so they take an extra minute on each call.
22 year old bill lives in the neighborhood spent $3,000 last year. He responds to our email, orders online. Gets the loaded meat pizza and picks it up at the store.
Who is the most valuable customer? I don’t know. You need to know for your business though.
And you need to think about how you market to the different audiences based on their actual margin. If Bill starts calling instead of ordering online, or has delivery even half the time, you might see your profits slip.
If you can drive better coupons to the Johnson’s based you their individual profitability, or get them to place their orders online, or get a few of their neighbors to order so you can spread your delivery costs the entire profit picture might change.
The time has finally arrived that organizations are getting serious about using email marketing for what it does best..drive value. Do we really care about relationships with customers? Of course not, what we care about is Lifetime Value (LTV). Relationships are only the means to drive increasing the value of your customers and converting your prospects. I hope that’s not too cold for you.
Anyway, for the next few posts I’m going to talk about the basic metrics to consider when thinking about LTV. Make sure that you never hit the ‘send’ button without considering these guidelines.
Lesson One:
There are only three numbers that drive customer value:
Acquisition cost is Dotcom Bust 101. Don’t pay too much to acquire a customer.
I’ll use the simple analogy of the Yellow Pages. If you spend $500 a month on an ad, how much business do you need to bring in to cover that cost? $500 right? Wrong! Add in margin and and defections, that number is probably more like $5,000. One problem is that (although not often accounted for) Brand new customers cost a lot more than existing customers to service. Think about even the most simple example of a Pizza shop. You call in for the first time and there is the extra time to enter all your customer data so that the next time you call in your stuff just pops up. The average cost per call in the pizza biz is about $1.50. For that first time caller it’s more like $2.50. Think what that added cost does to the margin on an $8.00 pie. (Now you know why they want you to order online.)
Well…you say: “we will average that acquisition cost over multiple orders and make it up.” Guess what? In the average business, 50% of customers never buy from you again. Are you average? Do you even know your defection rate?
That’s the core of LTV. You have got to know these simple stats.
Why the fascination with surveys? The other day I conducted a webinar on Implementing Dynamic Content. Big crowd, and at the end the attendees submitted questions. About 20% of those questions had to do with Surveys in an email. Basicly looking to ask subscribers what they want.
Not out of hand a bad idea, but something that you should not be entirely dependent on.
Why? Well surveys can give you some data. They are great to collect facts, things like addresses, age, gender….Basic Demographics. But what about the other stuff people usually want to ask in surveys?
You may have heard me say before; there are only three things you can learn about people:
1) Demographics; where you live, where you work, age, income…that sort of thing
2) What people say. As in: What people say they want.
3) Behavior. What people do.
Guess which one is the best indicator of the future? Right: Behavior!
I finished the new book BLINK last week. Interesting note from a study of Speed Dating. Before the event they survey attendees about what they are looking for in a partner. Then at the end they compare to who they actually picked. Think there was a close correlation to the two data points? HA!
