What Is A New Customer Really Worth To Your Business?
I get asked the question by our direct mail clients all the time – What can I expect as a return from this direct mail campaign? Honestly, that is a difficult question to answer. No one can tell you what you are going to get from any advertising program because there are too many variables. For example:
- How many competitors do you have?
- Pricing and is there demand for your product or service.
- The reputation of your company.
- The mailing list you are sending the piece to. Are they qualified suspects?
- The offer you are making, is it strong enough to create interest?
- The graphic design of the piece. Does it get the message across?
- The lead tracking system you have in place.
- How effective your employees are at converting leads and handling customers?
All of the above are just a few of the variables that affect the results of your direct mail program. Having said that, there is an effective way for you to gauge a response and more importantly how much will the return on your investment be. The follow is data you need to properly gauge the results of your Direct Mail program or any other advertising program.
So again what will your results be from a direct mail or post card campaign? I am sure you will agree this is a very important question. If you know the answer it makes tracking your advertising results easy. If you are buying postcards, trifold self-mailers or a simple sales letter direct mail program, you need to know what to expect, don’t you agree? Not knowing the answer means that you are never really sure if you got your money’s worth or not.
There is a term in advertising that has been thrown about so often it has become cliché. The term is ROI (Return On Investment). What is ROI? Is it the number of responses from an advertising campaign? Or, is it the amount of sales generated directly by the campaign? It could be both, however neither of the two represents what a true ROI is for a direct mail campaign or any other advertising program.
The answer to the ROI question can be answered by first asking, what is an average customer worth? How much do they buy over the course of the year? The answers to these questions put you on the road to being able to calculate a return on your investment?
Example: A friend of mine is a Chiropractor. He charges $50 for an office visit. The average patient spends about $2000 – $4000 per year. He normally, because of his good care, gets an average of 3 patient referrals from a patient in the first year.
So to answer the ROI question, using the above example of my friend the Chiropractor, if he spends $2100 mailing post cards and gets 1 new patient he basically breaks even. If he gets 2 or 3 new patients he has tripled his investment. This does not take into account the referrals he gets from the new patient.
By knowing the value of a customer you can set realistic goals for your marketing. This sounds simple but I have talked to many business people who look at the ROI question by the values of a single purchase from a customer. Using the above example of $50 per office visit, if the Chiropractor looked at it by the per office visit calculation he would need 42 new patients to break even on a $2100 advertising investment. It could happen, but is unlikely. 42 new patients would actually represent $126,000 in annual sales from a $2100 investment. This would be fantastic but not realistic in today’s highly competitive business environment.
Most businesses lose money on the first sale made to a new customer. The true value of a customer is realized over a long term. When you know the value of a customer you can then set realistic targets for returns.
The trick is in knowing the advertising ROI formula. Return On Investment (ROI) isn’t just what you make on the first sale. It is the money you make over the average lifetime of a customer.
Here’s how to figure out how much a customer is REALLY worth to you:
1. Know the Numbers
Start by gathering this important information:
a. What is the average initial ticket price (how much they spend when they first buy from you)?
b. How many times does the average customer re-order from you in one year?
c. How long a customer is retained (5 years, 10 years, etc.)
2. Apply the Formula
Dust off your basic algebra book. Using the letters above, plug your numbers into the formula: x = a x b= d (d X c). Of course (x) represents the potential value of an average customer.
a. Initial Ticket Price: $500
b. Number of reorders per year: 2
c. Average # of years a customer is retained: 5 years
The formula will play out like this:
$500 (a) x 4 (b) = $1000 (d) the value of the client in the first year x 5 years (c) = $5000 (X) the average total value of the client.
The lifetime value of your average customer is $5000. Now you have to figure out what it costs you to acquire a new customer and what you should be spending. We can help you figure this out too.
For help calculating the lifetime value of your customer, call us at 727-536-4173.