What will you pay to buy a new customer?

Increasingly I am finding that as clients actually “get” the concept of lifetime value it completely changes the way they think about their marketing.   Over the next few articles I will focus on the detail that often helps the idea to “click” in business owner’s minds.

Today lets talk about getting new customers – but keep in mind that getting NEW customers is not usually the most powerful way to grow your business in the short term – but it is on that list!

OK.  We are talking, and you say you want to do some marketing to get some more customers.  We already have strategies in place to increase your business not from new customers – so let’s go!

Question 1.  How much are you willing to pay for each new customer/client?  Answers are usually like – well I was going to put an ad on TV or Radio – for about $x,000 – and see what happens….

Hmmm.  I see.  And if you have done that before – what happened?    Umm.  Well not much.  OK.  So how many leads did it produce -and how many new customers from those leads?  Dunno.  About 10?  OK.  What was the average first sale ($) to those new people?   Dunno.  OK.  What offer or incentive did you give to the new customers to come back again?  None.  Ok.  When these new people came in – did you capture their names and contact details so that you could write or call them and welcome/thank them for coming in and give them a offer or incentive to revisit?  Umm, no.

OK.  So how much did it cost you to get those 10 new people to buy once from you with that experiment?  [Paid $3k, got 10 visitors who spent avg $110 at margin 40%.  Gross profit on sales $1100 x .4 = $440.  Less $3k for ads = $2560.  Divide by 10 new customers (let’s pretend they will all come back sometime even without an offer) and the cost per new customer was $256 each.

That is, and this number is often less than most people waste away on their marketing, he paid $256 for EACH new customer to come in ONCE.  No thought was given to how to make the process profitable.  No details captured.  It would have been more profitable to just pass out 20 x $100 bills in the street.

This is the marketing process of most people in business today, even though the concept of “lifetime value” of a customer has been around for decades.  Studies have shown that lack of useful training in one of the major factors in the horrific statistics on business failure.  Along with lack of financial literacy  – do YOU have an accurate cashflow forecasting tool that is up to date?  Probably not.  And that in my mind is the BIGGEST business crusher in the short term.  But that is another story.

Ok.  Let’s cover the basics of effective marketing in a quick and dirty way.

Rather than look at the potential profit on the first sale to a new customer as the return for the marketing, think instead about how much money that average customer will spend with  you during their time as a customer.

Example:  If average unit of sale is $1000, and average number of customer purchases per year is 3, and average time as a customer is 3 years, then lifetime customer value is $1000 x 3 x 2 = $6,000.

So the question in the example becomes how much would you be willing to invest to buy a customer that is worth $6k in sales over the next 3 years?  For your answer you need to know your margins, and logically also want to create strategies to increase that lifetime value by increasing the time that customer stays with, the number of transactions per year, or increase the value of each transaction, and so on.

So – if the margin in this example was say, 40%, how much would be willing to pay to get a new customer?   Consider that at 40% and average sale of $1,000 – there is $400 gross profit on the first transaction.  Would you be willing to break even on the first transaction to get a new (good) customer?  Would you be willing to make a loss on the first transaction if you had tested and had a process in place that predictably brought the customers back at least one more time?

So – did this concept CLICK in your mind yet?

Almost?  Well consider this.  Once you have determined the actual value of a customer – you can often just do away with a great deal of advertising.  Instead, get a list of prospects that fit your ideal client criteria – and send them a letter saying you have opened an account for them with an existing credit of $x00 they can use anytime in the next time period.    When they come in – you already have their details, you can track the return on your investment in them, and you get as many people you want to come in.

Am I saying to consider giving the money you would have used on advertising directly to your prospects?  YES.

Do you have to plan this and do it in a scientific, predictable manner?  Yes.

Does it mean you are just reducing your prices?  No.

Please comment below with examples you now see in the business world around you.  HINT:  think about the “free” $x00 phone when you sign up to a phone plan.    Or – which is cynical at this election time here – $25B if you vote for us?

More articles along this path coming so subscribe.

Cheers

James Hooper

Townsville Business Coaching

About the Author Business Coach James Hooper

Townsville based James Hooper: The term “rainmaker” is becoming regularly used in business context as someone whose role is to ‘make rain’ or ‘create growth’ in your business. In some senses the term ‘business coach’ is limiting as it is primarily about optimizing the effectiveness of the owner/operator. Sometimes the leverage is in the business systems rather than in the operator – and focus on that produces the preferred outcomes.

Business is a game, a puzzle, a tool to get you what you want in life. Call me for a second opinion (other than yours) on how to make your business give you what you want it to.

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3 comments
brianrober11 says 02/13/2011

[…] http://seminar.com.au/what-will-you-pay-to-buy-a-new-customer/ Business Coaching – what will you pay per customer? This entry was posted in Uncategorized. Bookmark the permalink. ← Previous Post Next Post → LikeBe the first to like this post. […]

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Marketing Blitz Now On Until The End of September – Hang On to Your Hat… | Seminar.com.au Townsville says 09/03/2015

[…] If you have a restaurant and your food quality is inconsistent – fix that before you increase the number of new diners you bring in.  In business, the numbers do not usually add up nicely when there is only one purchase ever.  The lifetime value is too low.  Read this Marketing Article About New Customers. […]

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Marketing Townsville | Seminar.com.au Townsville says 09/03/2015

[…] Note that it does ask how many times the phone rang with an enquiry [that would be your ‘response rate’].  It does not ask how many of those leads became customers [that would be your ‘conversion rate’ for that advert].  It does not ask what your gross profit for each sale produced from a lead from that advert.  Nor does it ask the average number of times a new customer from that advert will buy from you again.  Or if that new customer gives you any referrals (if you deserve them and have a system to collect them).  See my article on lifetime value. […]

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