Gary Hennerberg's Four-part Series on Marketing Costs
Want to tweak the numbers more? Develop a long-term customer model.
Gary Hennerberg consults with companies to improve marketing performance. He specializes in planning, research, analysis, and forecasting, and can be reached at firstname.lastname@example.org or by telephone at 817-318-8100. His Web site is www.hennerberg.com.
DEVELOPING A LONG-TERM CUSTOMER MODEL
By Gary Hennerberg
A long-term customer model is essential to completely evaluate the results of customer acquisition efforts. Not only do marketers not make any money on the first sale, it often takes two or three sales before reaching a break-even point. It's a valid strategy in building a business.
To create a long-term value model you either research actual information on your current customers, or you will need to make several assumptions, if you are developing a long-term model for a new business.
In the last Tipline article, "Calculating Allowable Marketing Costs," the following assumptions were made:
Average Order: $100.00
COGS: $ 40.00
Fulfillment: $ 15.00
Overhead: $ 15.00
Profit Objective: $ 20.00
Total Costs: $ 90.00
Allowable Marketing Cost: $ 10.00
Here is what you must do to build upon the Allowable Marketing Cost model to determine your customer long-term value.
- Determine if first-time customers actually produce average orders of $100. It's not unusual for first-time customers to have lower average order sizes.
- Identify the retention level from first-time customers. If you have 7 percent of your first-time buyers return for every 100 customers calculate what happens when seven order.
- Identify the retention level of second-time, third-time and even as fourth-time buyers.
Factor all revenues and costs based on these levels of purchase, and ultimately you will know the total revenue value after several purchases, as well as related costs.
Upon knowing these numbers, you can plot exactly at what point you should break even. How do you use this knowledge?
- Circulation planning. If you determine it is acceptable to break-even after three years, you will know which media or lists exceed your preferred response.
- Which media to enhance. If you use many mailing lists and there are several that fall slightly below your acceptable response, you can examine alternatives to boost the response of a list. A basic ZIP model may do the trick for you.
- Long-term planning. If your business is a start-up, having this model will enable you to predict when the business will break-even, something any savvy investor will demand knowing. If you're an established business, it enables you to plan your business' long-term destiny.
To understand your complete marketing picture for new customer acquisition, a long-term value model is essential, and it's easily created on a spreadsheet.
Reinventing Direct is for the direct marketer seeking guidance in the evolving world of online marketing. Gary Hennerberg is a mind code marketing strategist, based on the template from his new book, "Crack the Customer Mind Code." He is recognized as a leading direct marketing consultant and copywriter. He weaves in how to identify a unique selling proposition to position, or reposition, products and services using online and offline marketing approaches, and copywriting sales techniques. He is sought-after for his integration of direct mail, catalogs, email marketing, websites, content marketing, search marketing, retargeting and more. His identification of USPs and copywriting for clients has resulted in sales increases of 15 percent, 35 percent, and even as high as 60 percent. Today he integrates both online and offline media strategies, and proven copywriting techniques, to get clients results. Email him or follow Gary on LinkedIn. Co-authoring this blog is Perry Alexander of ACM Initiatives. Follow Perry on LinkedIn.