Optimizing Marketing Efforts:
Outcompeting Your Competitors by Understanding Customer Worth
To determine how much they can afford to spend to get a new customer, many marketers base that figure on the average size of the first order.
Therefore, if the front-end product or service is $500, they won’t spend anywhere near that to acquire the customer, for fear of operating at break-even or even a loss. If they want to double their money on the promotion, the most they’ll spend to make the sale is $250.
But savvy marketers know that the amount of money you can spend to acquire a new customer should be based on the customer’s lifetime value, not just the revenue from the first order.
Lifetime value refers to how much money your customer is likely to spend with you during the period he remains a customer of your business.
For instance, if the average unit of sale is $500, the average number of purchases per year is two, and the average customer remains a customer for 5 years, the lifetime customer value is $500 X 2 X 5 = $5,000.
Based on the average lifetime value, you can see where it would in fact be worth spending $500 to acquire a new customer.
The business owner who understands lifetime customer value as it relates to customer acquisition has a tremendous advantage: He is willing to spend more to acquire new business, because he knows its true value.
Example: A company selling books to corporate librarians asked me to devise a marketing campaign to get new corporate accounts to start ordering books from them.
I asked the owner what he would be willing to spend to get a new account. He said about $300.
Forget advertising, I advised. Just open up an account for every company you want as a customer—and put $300 in it!
Send each prospect a personal letter telling them they already have an account with you—and that it contains $300 they can use at any time this year.
Instead of a sales or marketing campaign, my client gave the money he would have spent to generate leads and makes sales calls directly to his key prospects, so they could try the service at no cost. It worked like a charm!
Today online trading services use the same tactic. They send you a letter telling you they have opened an account for you with $75 or so in it. You get the money when you do your first trade.
Need to stimulate business? Calculate lifetime customer value, decide what percentage of that amount you want to spend on acquiring new customers (10% is a common figure), and basically just give potential customers the money in exchange for trying your product or service.
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