The holiday season and year end planning are upon us. As of this writing, consumers are increasingly jolly with their shopping, based on personal income reports.
Third-quarter real GDP was revised upward again to an annualized increase of 2.6 %, manufacturing inventories are up, an indication that business is increasing production to meet future consumer demand. Manufacturers are bullish about customer growth, are you? What’s in your new customer plan?
Many businesses take stock this time of year and review the past 12 month’s results and make business plans for the next year or two. What were your challenges? What were your successes? What will you do differently to make up the gap between your goals and actual results?
Grow or …
If you’re like most business owners, you’re looking to grow your business this year not just survive. You’re either growing or your dying. There is no status quo. Your competitors are scheming every day on how to steal your customers and keep them. And there’s only three ways to grow a business:
- Create more new customers
- Increase your current customer’s average sale
- Get your current customers to buy more frequently
Number one is the most sort after strategy, and the most expensive to your business, so let’s start there for now and see if we can make it more profitable this year.
So what’s a customer worth?
Any strategy about new business development generally revolves around Return on Investment (ROI) right? But most business owners make the mistake of taking a myopic, one dimensional and shortsighted view of ROI. You’ve got to examine, measure and calculate the front-end profits as well as the back-end, and you’re got to know a few other metrics other than ROI… like CLV, CPA, and average sale.
Customer Lifetime Value (CLV) is a critically important concept that too few small to medium sized businesses evaluate. It’s the amount of revenue you’ll generate from a customer over the lifetime that customer favors your business with purchases during their relationship with you.
For example say you’re a service company that sells, installs and services equipment for residential homes and you know your average customer spends $100 a month on your service. Over 12 months you generate $1200 from the average customer. For simplicity, let’s assume these figures include all other expenses and costs and they represent the net profit to you. OK here’s where most business owners stop. In fact you’d be surprised at how many just look at the first $100 or two. But think about it, you earn more than that.
You do a good job right? And that customer stays with you longer than a month, or a year. In fact let’s say you know that on average your customers stay with you for 3.5 years before moving, dying, migrating to a competitor etc. So that means that his CLV Customer Lifetime Value is $4,200. ($100 average sale x 12 months x 3.5 years) Hmm, that’s a lot more than that $100 sale you first made, eh?
What should you spend to get a new customer?
Ok, so the next step is to figure how much you’d spend to acquire that $4,200 customer. Big companies spend a lot of time with this. Many chief marketing officers, and their CFO bean-counting counterparts, believe 10 percent of CLV is a good estimate. So in the above example you could invest $420 in marketing dollars to bring in a new customer. It’s considered the allowable cost per acquisition (CPA).
So here comes the Dutch Uncle talk. If you’re not reaching your customer growth goals, chances are you’re not spending enough to effectively market your company to keep it growing. There, I said it. Remember, some of your customer growth is just to back fill your natural customer attrition. You pick up 20 new customers a month, but maybe you’re losing 10-15 without knowing it. Maybe you’re losing 20 or more!
If your sales are suffering, you can’t be gaining that many new customers can you? You’ve made all the cuts in spending by now in this economic slowdown, so your profits may be flat or not declining that fast, but growth?
If you’re gaining customers but sales are still flat, then you need to also concentrate on #2 and #3. Remember, the three ways to grow any business above? I’ll cover those strategies in another post. Right now we’re creating new customers.
How many customers do you want?
So when you’re looking at your budgets these next few weeks, remember who butters your business’ bread. Marketing is an investment in sales growth. Don’t treat it like discretionary items. Tougher times require tighter targets. If business is off, do you fire all your salespeople or hire more? Your marketing dollars are your sales people.
So how many customers do you want in 2011? Fifty, one hundred? More? You know what the CLV Customer Lifetime Value is, and you know what an acceptable CPA cost per acquisition for each new customer is. Your budget is now strategic and mathematical, not emotional and undisciplined.
If the service company above wanted 100 new customers in 2011, and he generates $4200 on each (CLV), and his CPA is 10% then his annual marketing budget to acquire those 100 customers is $ 42,000 or $3500 per month. (100 New Customers wanted x $4,200 CLV x .10 CPA = $42,000 Marketing Budget)
So enjoy the festivities, have some holiday cheer and set your sights on a prosperous 2011. Analysts believe that a recent increase in consumer spending along with the extension of the tax cuts approved by Congress may further gin up additional growth in the months ahead. Anything can happen, but for now there’s reason to celebrate…and plan ahead.