Here’s a simple test with just five questions. Ready? Begin.
1. What’s the value of a customer over the course of her lifetime?
I want you to picture a regular customer, and I want you to think about how much that customer’s average ticket is and how often they buy from you. Multiply the average ticket by number of visits between now and when she no longer needs what you sell.
But you’re not done. Your customer-for-life has friends, doesn’t she? If you’re as good as she says you are, her friends are going to want to do business with you, too, aren’t they? Let’s say she brings you just ten percent of the people, 15, with whom she’s close (a number which I happen to know is 148.7).
So, multiply her personal lifetime value times 15. Write that number down and set it aside. It’s how much potential one happy customer (conservatively) is worth to your company (not counting the next generations of delighted friends of friends and family).
2. How much does it cost to acquire a new customer?
This is also pretty easy to calculate for most companies. Let’s take last year’s total marketing budget and divide by the number of new customers you acquired last year. That gives us our cost of customer acquisition.
3. How much do you want to grow?
Provided it’s not obviously impossible, this number’s entirely up to you and your market potential. To get a rough estimate of market potential (the total dollars spent per year in your trade area in your category), have your team list out all your competitors and estimate what they grossed last year. Throw out the highs and lows and average the rest, and you’ll be shocked how close this number comes to the more specific calculations my company does with new clients.
4. Last year, what percentage of your marketing budget are you certain worked?
What do you these numbers tell you?
They usually tell me it’s much more profitable (and fun) to delight your current customers with Shareworthy Service than to acquire new ones.
I’m not saying it’s not worth doing some of both. I’m simply saying you might consider moving some of your advertising budget into your customer retention budget.
5. You do have one of those, don’t you?