The Customer Store
The Customer Store
PROBLEM
If you could go down to the "customer store" and BUY a new customer off the shelf (or a pack of twenty, or a multi-pack of 100 new customers) .... how much would you pay for each one?
Or how much COULD you pay -- and still make a profit out of each customer?
How much money is each new customer worth to you? You really SHOULD know the answer to this question.
Why?
Because once you know how much you can afford to pay for a customer -- and still make a profit -- you can 'buy' as many new customers as you want ..... as long as you can find a source which allows you to buy them at a price you are happy to pay.
'Buying' customers can mean giving them an introductory discount, or a free gift or consultation with their first purchase.
Or it can mean buying adverts to attract them, or having 'Fire Sales' days, or taking each new client to lunch (knowing how much you can pay for that lunch and still make a profit from the client). Or ..... or ......
You can make informed CHOICES.
So how much could YOU pay for a new customer and still make a profit?
SOLUTION
In order to know the TRUE answer to this question (as opposed to the answer you just plucked out of the air) you need to know the answers to two further questions .... which reveal how much you know about the present profits and future chances of your business.
Those questions?
- What is the AVERAGE profit that a new customer brings you over the first three months after they make their initial purchase?
(This includes your profit from the first purchase).
- What is the AVERAGE profit that a new customer brings you over the course of their lifetime as your customer?
(Most businesses calculate this as three years. After three years most customers have left the district/got bored/gone bust or just gone. Your situation may be different, but if you don't know -- work on three years).
An Example
If you know that -- on average -- every time a new customer walks through your door they spend something on an initial purchase, plus a couple more purchases over the next 13 weeks to a total of $250.... and that you make $100 PROFIT on those purchases ....
Then you could 'buy' a new customer for $95 and still make $5 profit -- over 3 months, right?
If you could buy the same customers for $50 each, then you would double your money every time a new customer walked in your door.
Yippee!
BUT
Suppose that it costs you $150 to 'buy' a new customer, but they only brought you $100 in profit during the first three months. Are you now in trouble?
Maybe. If it turns out that you only make $100 during the first three months, but (on average) you make $2,000 from each new customer over the course of the next three years -- it's still worth paying $150 for a new customer ... you just have to wait a bit longer to get your money back.
In this case you'd need to be careful not to buy too many customers at the same time. You need to have a controlled programme of customer acquisition.
In both cases, once you know the answers to the two questions, you can make an INFORMED CHOICE.
You can decide to buy some new customers this week, or hold off 'till next month.
You can choose to buy them at $50 each but not at $75. It's your choice. YOU ARE IN CONTROL.
Advertising for Customers
In real life, of course, you can't just go down to the customer store and buy some off the shelf.
You have to do the next best thing. Advertise.
Because isn't the process of advertising really the same thing as buying customers?
If you place an effective advert in the right place at the right time .... it's just like buying customers off the shelf.
The only question is ... how much should you spend?
And once you know the value of a new customer, and the lifetime value of a customer -- you know how much you should be spending on effective advertising to acquire them.
Easy Peasy.
There's just one small problem. We agreed:
"If you place an effective advert in the right place at the right time..." and there's the problem.
What's an effective advert? Where's the right place? And when's the right time?
I can help you solve those problems, but before we discuss that let's do some calculations.
If you don't know how much you can afford to buy a new customer, then you don't know how much you should be paying for an advert, so there's no point in going further, is there?
So now, lets calculate YOUR 'customer buying' numbers.
The Immediate Value of a Customer
To do this, you need to examine your sales ledger.
Examine all the sales for the last three months, and put a mark against those customers who have bought something for the first time.
See how many OTHER items that customer has bought, and total the sales you have made to them in the last 13 weeks.
Now add the value of ALL the sales you have made to NEW customers, and divide that figure by the number of new customers.
Now you know how much (on average) each new customer is worth to you in sales.
If you now apply the average profit you make on each sale to that sales figure, then you know how a new customer is worth to you.
You know how much you can spend to 'buy' a new one -- and still make a profit.
What's that? You don't have a way of identifying which customers are the new ones, or which customer bought more items after the first sale? You can't track your customers to the purchases they made?
Let's try to make the calculation another way. This won't be as accurate, but it's a start.
Add together your total sales for the last three months.
GUESS how many new customers you have attracted during this time.
Divide the first figure by the second.
Value of customer = profits from all new customers over last 3 months
number of new customers
The Lifetime Value of a Customer
This is more of the same.
Unless you KNOW how long (on average) each customer, stays with you, it's best to GUESS this figure as three years. Some stay longer, some leave early.
Take the total of your last three years sales figures and divide it by the number of new customers you have attracted during this time.
(If you haven't been going for 3 years, round up your figures from the time that you have been in business.)
That is the Lifetime value of a new customer to you.
Value of customer = profits from all new customers over last 3 years
number of new customers
How to Make Controlled Advertising Work as your 'Customer Store'
Make the RESULTS of each advert PREDICTABLE.
Results are predictable when you KNOW that .... if you run advert X in publication Y ...... you will get, say, 150 new customers at an average cost of, say, $35 each.
Once you know these figures, then running this ad is the same as having a 'customer store', isn't it?
Once you are in that happy position, whenever you need some new customers .... you just run the ad. When you have as many customers as you need for the moment -- stop the ad.
So how do you discover these numbers for YOU and your situation?
Through TESTING. You test three variables.
You test your offers, your ad copy, and the places where you run your ads.
Offers
You can make several kinds of offer.
- A free gift
- A discounted item
- An invitation to visit
You need give the reader of your advert a REASON to respond.
This is usually a time-limited offer.
Customers in one market will respond to an offer which customers in another market will ignore. You can only fond out which offers pull the best response from your customers by testing.
A good place to start your tests is to research the offers made by other suppliers to your market. What offers do THEY make?
Ad Copy
Having chosen the offers which you which to test, how do you PRESENT that offer for maximum impact?
When you are in the testing phase, it is usually a good idea to advertise a coupon or other kind of response device.
Every time you run an advert, you put a different number on the coupon. This way you can track which adverts pull the coupons, and which don't.
Media (where you place your ads)
The most compelling offer, presented with the greatest impact, will be useless if it is offered to the wrong audience at the wrong time.
Offering a 'women-only' product in a men's magazine will likely prove as disastrous as offering a lawnmower during a Canadian winter.
The way to test media is ..... cautiously.
If you test a small (say, quarter page) advert in a trade magazine and find that you get an adequate response, you use that as your first control.
Control
You use this advert as your 'test bed'.
First, you change the offer a couple of times, and see if a new offer (to the same audience, and with the same copy) pull more replies. If it does, then this new advert becomes your control.
Next, you test other media. Does this advert and offer pull more replies in other trade publications, or in local papers. or on local radio or TV?
If you get better results from other media, then they should be where you spend your money first.
BUT
If you need 250 new customers over the next two months, and your figures show that your most effective medium (say, the local paper) can only deliver you 150 ..... then you need to use them and ALSO some other media.
Which is why you need to test several media -- AND keep them ready in case they're needed.
Finally, you test the copy. Keeping the same offer in the same media, you change the headline of your advert, and tweak the body copy to see if you can improve the response.
Quick Action List
1. Calculate the Immediate Value of each new customer to your business.
2. Calculate the Lifetime Value of each new customer to your business.
3. Calculate how much you are willing to pay to acquire each new customer.
4. Experiment with different adverts and different media to TEST which ones 'buy' you new customers at a price you are willing to pay.
5. Roll out the successful tests to major campaigns to expand your business and your profits
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