How Much for a New Customer?

Here’s an old idea: customer lifetime value (CLV).

Why is it worth revisiting? Because, for any CLV model to be useful, one needs to derive (or even just start with a guess at) a specific number from which to calculate.

I first came across CLV in the early 1980s, trying to convince the boss to spend a little more on a direct mail campaign test. My logic was impeccable: If we could get new three customers for our $15,000-$30,000 software product, the profit would more than pay the $15,000 I was asking for paper, print, and postage.

Though my logic was sound, I only had visibility into the marketing department and had no inkling of the models my boss (and his) had built to account for overhead, accounting, technical support, customer service, and the fact that nobody ever spent $15,000 or more after receiving a post card.

I was gently told that the cost of a direct mail campaign was not the total cost of customer acquisition. The combination of magazine ads, public relations mentions, listings in software directories, reviews by independent industry research analysts (which were bought and paid for), trade show booth space, etc., had to be added to the cost of the sales process: travel for in-person meetings and sales reps’ salaries all went into their models.

“So how much is a qualified lead worth?” I opined.

“Quite a bit,” they responded.

“So how much can I spend on marketing?” I rejoined.

“As little as possible,” they concluded.

Ever since, I’ve been sensitive to how much I spend on marketing and how much is spent on me as a prospect. This past week, three different incidents brought this to the fore.

A Penny for Your Thoughts

My wife cannot understand my fascination with junk mail. She is so opposed to it on all levels that she is more inclined to toss out a perfectly valid bill than besmirching her delicate digits by opening something as egregious as an unsolicited solicitation.

I, on the other hand, love to see how companies do marketing and sometimes it pays off. Last week, it paid $2. It was a survey from Nielsen TV Ratings Survey. I happily pocketed the cash and tossed the survey. Sorry, Neilsen, my time is worth more than that.

$4 for Your Address

I like real, paperback books for airplanes, for when I’m just too tired to work and a good book helps me fall asleep. On more than one occasion, my eyelids drooped and the book went into the seat pocket in front of me, where it stayed, unnoticed, as I deplaned.

Last week, I was 20 pages away from the exciting end of Acts of the Apostles (Mind Over Matter Series) and got home to find I was bookless.

I immediately went to Amazon and found it… for a penny. And – icing on the cake – it was available via Amazon Prime; zero shipping. One penny.

amazon-prime-book

I clicked “Two-Day 1-Click” without hesitation

I then started wondering how much it had cost “gi3 (seller)” to get me into their database and how they might recoup that cost? Assuming that they paid something like $4 for the book and had a deal with Amazon for the shipping, it was now just a matter of time before they would start selling me on to fourth-, fifth- and sixth-party database aggregators. For the solicitations I am about to receive, I thank you.

$4 for Your Permission

Two days later, a quick stop at a CVS Pharmacy netted me a fresh bottle of vitamin D, my annual purchase of shampoo, and a 6-foot-long cash register receipt that included some percent off this category and some dollars off that category as well as $4 cash.

cvs-receipt

I could get $4 just for opting in to receive promotions for the loyalty card I had in my pocket. And here I thought a loyalty card meant I had already signed up for everything they could possibly throw at me. Turned out there was more – so much more that they were willing to give my $4 just for saying yes.

I balked. A $4 book for a penny? Good deal. A blatant payoff in exchange for my permission? It just didn’t pass the smell test.

Do the Math and Listen With Your Heart

Once you work out how much a customer is worth, you can decide if you can spend $15,000 on a direct mail campaign, $4 for a postal address, or $4 million for 30 seconds of the Super Bowl.

You models will vary, but at some point, you must determine how much you’re willing to pay for a lead and what constitutes a qualified lead.

Otherwise, if you’re just after branding, take Seth Godin’s advice. He tells about being asked how to allocate a $10 million advertising budget on the launch of a new product: “Take $8 million out to the parking lot,” he said, “and set it on fire. You’ll get more media attention than you can buy with that kind of money – and you will have saved $2 million.”

Homepage image via Shutterstock.

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