A client recently bemoaned that she was investing as much as she possibly could in marketing her business, often times at the expense of her drawing a salary. When we asked her how much new business was coming from these marketing campaigns, she shrugged her shoulders.
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” ~ John Wanamaker, Advertising Pioneer
Today we have mounds of data on everything from customer acquisition to customer retention and while this information is designed to create efficiencies and improve the way we do business, it actually only serves to create more confusion. Studies show that having a bunch of information doesn’t necessarily help you solve the problem.
When it comes to getting and keeping customers, there are two key metrics that every business owner should know:
Customer Acquisition Cost (CAC)
If you have an expense line item for marketing and advertising campaigns, then you should be tracking how much new business is coming in as a result of those campaigns so that you can measure its effectiveness. One client had invested $6,300 over a three year period with a glossy magazine that gets drop shipped into a geo targeted area. The seductive pitch of it landing on the desk and countertops of 30,000 of her ideal customers was too good to pass up.
Since she tracks in her CRM how her new customers find her business, it was a simple matter of pulling a report that revealed it was a wasted investment. She didn’t receive even one new customer from that campaign. Further, when you put it in perspective that if she had acquired, for example, 3 new customers as a result of that campaign, her CAC would have been $2,100 (that’s $2,100 for each new client!). Can you get a new customer for less than that? Absolutely! You can get leads for a few dollars in Facebook all day long.
Every marketing campaign should be measured against your CAC. Simply break apart your marketing line item and understand how much is being allocated for each campaign, query your new customers as to how they found you, monitor the results, make decisions as to whether the results are in alignment with your goals then slash and burn what’s not measuring up.
Customer Lifetime Value (LTV)
Walk into any bookstore, go to the business section and what you’ll find is that the vast majority of them are written about customer acquisition. While acquiring new customers is essential, Gallup estimates that businesses are only doing ⅓ the business they should be doing with their existing customers. That means if you’re doing $1 million in sales, there is a full $2 million in low hanging fruit that is going unpicked. If you want to pull the profit lever in your business, this is the metric to dial down.
The key to increasing profits is to get your existing customers to come more often, buy more and tell others.
Businesses that focus extending customer engagement beyond the first transaction have a higher probability of creating greater customer loyalty, which equates to higher profits.
The benefits of knowing your LTV:
1. You can increase LTV by extending your product and service offerings.
2. You can put parameters around what you would be willing to invest to recover that customer should things go off the rails
3. You now have an understanding of how much to invest to acquire a new customer. For example, if your LTV is $1,500, you can make an investment decision based on real numbers, not guessing. A good rule of thumb is 5:1 ratio (LTV to CAC).
While it’s easy to get bogged down in the process of getting and keeping customers, keep it simple and focus on the two metrics that tell you the true story of your customers. Manage and monitor your campaigns closely so that you can determine your CAC and make swift decisions if they fail to deliver results. Cautiously enter into long term advertising agreements that don’t give you an exit if it’s not performing to your metrics. Keep your finger on your LTV as it is the True North that will guide your increased profitability.
Pamela Herrmann & Patty Dominguez are the Co-Founders of CREATE Buzz, committed to helping small businesses get customers and keep customers by taking the overwhelm out of technology, thus creating sustainable thriving businesses that are relevant. They co-host The Morning Would Show bringing the latest in marketing tips and strategies.