The Magic Number in Any Good Marketing Strategy
Recently I met with an entrepreneur who had just received an offer from a much bigger competitor that wanted to buy his business from him. He had lots of energy and enthusiasm for what he did and he wasn’t about to sell his business for a penny less than he thought it was worth. One of the things that the potential purchaser of his business had asked him to provide was examples of the marketing approaches that worked for his business and also, interestingly, the approaches that hadn’t worked.
As we talked, he explained that his recommend a friend system was one of the most powerful ways he’d found of attracting new customers. (It was simple, it rewarded both the existing customer and the new customer – and he was correct, one look through the numbers proved that it really worked for him.) Other than that though, he didn’t have any other proven ways of generating new customers and he was worried that the potential buyer of his business would use that weakness to drive the price down.
So I asked him which marketing approaches hadn’t worked. He went on to list a number of initiatives in his marketing plan that had failed to deliver a decent return. As he explained one approach that had failed (distributing leaflets in the train station of the local area he operated in) I realised that he was overlooking something that had the potential to triple, if not quadruple the value of his business.
He had been working out his return on investment figure based on the immediate return that each marketing initiative had delivered, instead of the lifetime value of each customer. The leaflet distribution approach had only been tried a couple of times, and it had produced 4 customers. He went onto explain that 4 customers didn’t even cover the cost of printing the leaflets, never mind the cost of designing and distributing them.
When we dug a bit deeper into his numbers, it emerged that each of his customers, although they had an low initial spend in month one (around £48 each), they actually stuck around for an average of 11 months, spending and average of £440 each over that period. As he’d been working out his return on investment based on each customer’s initial spend, it appeared that leafleting the train station was a failure. Now he could see that he had made an average of £440 for each of the 4 customers he’d generated over their ‘customer lifetime’, which worked out at £1760. What he’d dismissed as a failure was actually a money making system. He immediately started to plan more leaflet campaigns in higher volumes across the region – he was invigorated and excited about the opportunity that lay ahead for him.
This experience served as a great reminder that your existing customer list gives you the answer as to what is probably the most important question in any successful marketing plan or marketing strategy: ‘What is the average lifetime value of your customers?’
Here’s the equation:
Average Annual Profit Per Customer x Average No. of Years a Customer Stays = £Lifetime Value
The reason this number is critical in your marketing strategy is that you then know how much you can invest ‘buying’ each customer. As long as you invest less acquiring a customer than they spend (minus costs) over their ‘lifetime’ with you, you’re making a return. The most exciting thing is, it’s a system, it scales. Imagine a machine, that when you dropped £10,000 into the machine, £11,000 came out. How many times would you do it?
If you’ve never worked out your customer’s lifetime value before, you’ll be amazed. If your company is delivering a great product or service it is quite possible that customers stick around for years which gives you a healthy budget to acquire new customers. As long as customers cost less to ‘buy’ than they spend with you (after costs) – you have the foundations of a solid marketing strategy.