Monday, September 27, 2010

What Am I Really Spending to Get New Customers and Clients?

Last week I shared a formula for determining the lifetime value of customers and clients (LTV). This is useful in helping us decide what we’re willing to invest to engage and keep our audience as repeat clients. Today I’m going to share another useful formula: Client/Customer Acquisition Cost (CAC). This formula will tell us what we’re actually investing, on average, to gain each new client.

Although there are methods of getting down to very specific numbers, it’s more important to have a good idea of our CAC than it is to have it down to the penny (at least to begin with). Determining our current CAC is accomplished by gathering information on all our marketing-related expenses for new customer/client acquisition over the past 12 months. Using a 12-month period is good for coming up with a true average. Leaving out expenses specifically directed at retention and loyalty campaigns is good since these are not part of initial acquisition.

Once we have our 12-month expenditure number, we need to find out how many new customers or clients we have acquired during that same 12-month period. Once that number is known, we simply divide our investment by the number of new clients we’ve gained. Here’s the formula:

$ Invested in Acquisition Marketing Activities (past 12 months)
/ # New Clients in the same period
= Client Acquisition Cost (CAC)

As an example, if we’ve invested $10,000 in new client acquisition marketing activities over the past 12 months, and we’ve gained 100 new clients, our Client Acquisition Cost (CAC) is $100.

In conducting this activity, many will find their CAC is far too high, calling for a need for more targeted marketing efforts. Others will find they can afford to invest more in each new client, allowing them to accelerate client acquisition rates.

Questions? Comments? Let’s hear them!

Here’s to your marketing success!

Bryan Waldon Pope

Monday, September 20, 2010

How Much Should I Spend to Get a New Customer?

A common question posed to me is: “How much should I be willing to spend (or invest) to get a new customer (or client)?” This question is closely related to another common one about how to set an appropriate ongoing marketing budget.

It becomes much simpler to decide how much to invest to get and keep clients when we know how much money each of those clients means to our bottom line. If, over the course of a client’s lifetime with us, we’ll profit $100 from him, it doesn’t make much sense to invest $150 to get him. While this may sound obvious, it’s surprising how many business owners merrily go along their way having no idea what their company’s average lifetime value of a client (LTV) is. Knowing this number will go a long way to helping us determine the answer to the question posed above.

The determine LTV, follow this simple equation:

Average Transaction $
x Average # Transactions/Client/Year
x # Years of Average Client Activity
= Gross Lifetime Revenues
x Profit Margin
= Lifetime Value of a Client (LTV)

You’ll note my version of LTV is a bit different from other explanations you may have seen. Most end before multiplying the Gross Lifetime Revenues by the company’s average Profit Margin. To me it makes no sense to look only at revenues since profit margins vary so much between companies. In the end it’s all about profits, right? If this is true, LTV needs to be based on profits, not revenues.

Now you can look at the profit you’ll enjoy from a client, on average, over their lifetime as well as during any given year. Armed with this information, you can now make a much more educated decision as to what you are willing to invest to get and keep that new client.

Bryan Waldon Pope

Monday, September 13, 2010

The Butterfly Effect in Marketing

The Butterfly Effect suggests that small variations in the initial condition of a dynamic system may result in vastly differing outcomes over time. I won’t go into the history of the coining of the term, but suffice it to say that one notion of The Butterfly Effect is that when a butterfly flaps its wings in one part of the world, it affects the behavior of weather far away in another part of the world.

This principle can be applied in just about any facet of life. It is very applicable when we talk about marketing. Today I’d like to share just three ways The Butterfly Effect may apply to our marketing efforts:

1. Small amounts of time and effort spent consistently can produce dramatic results. Many business owners with whom I work are the marketing decision-maker for their businesses. They don’t have a full-time marketing director, manager, or even assistant. Especially in such cases we see the most significant proof of this concept. Spending 30-60 minutes a day or a half-day a week consistently on marketing efforts can pay off in a big way.

One such example was a two-person business who, after listening to me speak, decided to distribute flyers for one-half day each week. They began immediately, and within a few weeks they were in the best financial position they had been since opening their doors.

2. The smallest act of kindness toward a client can bring back a tidal wave of business. Sometimes going the extra mile with a client increases the loyalty of that client, but doesn’t go any further (which isn’t a bad thing – we’ve still won in that case). But occasionally, a particularly satisfied client becomes an avid promoter for the business that went above and beyond.

In today’s digital society, good news can travel faster than ever. It’s easy for people to share their positive experiences with others, including businesses. Making these “acts of kindness” part of our companies’ cultures and daily operations can have a monumental effect on our success. Think “Zappos.”

3. A seemingly insignificant oversight or error can come back to bury your company. I’ve noted two positive ways The Butterfly Effect can bring greater success to your company through relatively small marketing efforts. Here’s one on the other side of the fence.

I once worked with a company that had a customer complaint come back to them about how they had been served. The complaint was unfounded by any reasonable person’s judgment. The company told the customer nothing would be done to rectify the situation. And, based on my understanding of the situation, they had no reason to. The customer was dead wrong. Unfortunately, the customer took legal action and the judge saw things differently. The event resulted in the company’s demise. They filed bankruptcy and closed their doors. The saddest part of the story is this: for a day’s time on the part of one of the principals and two or three thousand dollars, the whole situation could have been averted. A significant investment, you say? It seemed so on the front end. After all, the customer was wrong. Period. But in the end, it would have been a very inexpensive fix. Hind sight is 20/20.

What other Butterfly Effect scenarios do you potentially see in your marketing? What small efforts can result in significantly different outcomes for you and your business? Please share your thoughts.

Here’s to your marketing success!

Bryan Waldon Pope

Tuesday, September 7, 2010

How Competent Are You as a Marketer?

In the 1940s, psychologist Abraham Maslow gave us The Four Stages of Learning. It’s an eye-opening framework used to determine one’s competence level in just about any area of life. Once you know where you’re at, you can create meaningful action steps to get to the next level. I’d like to apply Maslow’s insights to the world of marketing.

Stage 1: Unconscious Incompetence--you don’t even know that you don’t know something. This is the most dangerous of places to be with regard to marketing if you’re a business owner or other person responsible for making business happen for your company. Don’t assume you’ve got things figured out. Open your eyes and your mind to what’s going on around you and discover marketing issues, trends, and techniques of which you’re currently unaware. The Unconscious Incompetent does not last long in business.

Stage 2: Conscious Incompetence--you know you lack information and experience. This is a much better place to be than Stage 1, although it still doesn’t immediately benefit your business. You realize you lack marketing skills, education, and experience. Hopefully you’re willing to consistently invest time and energy to move to the next level. Awareness is good, but action must follow.

Stage 3: Conscious Competence--you know how to market your business, but it’s accomplished with a significant exertion of effort. It takes too much time. Efficiencies are lacking that would bring greater results with less investment of resources. Marketing is still something you probably don’t truly enjoy. It’s still a necessary evil.

Stage 4: Unconscious Competence--marketing has become part of who you are and how you do business. Let me note that I’m not a total believer in Maslow’s use of the term “unconscious” in this stage. I’d rather consider this stage “Automatic Competence.” The Automatic Competent marketer consistently enjoys a solid return-on-investment on marketing activities. Marketing is not something that is “done” from time to time; it’s an integral component of daily business. The company is a marketing company first--and it shows in both revenues and profits.

What stage are you at right now as a marketer? What do you need to do to progress to the next level? How will making that effort pay off for you and your company?

Share your thoughts, ideas, and questions below. Let’s take you to the next stage in becoming automatic in your marketing activities.

Here’s to your marketing success!

Bryan Waldon Pope