AKA You need to know how much a customer is worth in order to determine how much to spend to acquire them……
As mentioned by both Jim Novo and Seth Godin in there posts regarding the lifetime value of a customer, you need to know how much cash the average customer generates for your business over a set duration of time.
SG then goes on to suggest that:
Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it’s important to not only recognize but embrace the true lifetime value of one more customer.
Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers? That’s more money than you have to spend right now, I know that, but what would happen? Imagine how fast you would grow, how quickly the word would spread.
The problem with Seth’s approach is that it ignores some fundamental basics like “That’s more money than you have to spend right now, I know that, but what would happen?” What would happen is that most companies would probably go broke because they haven’t figured out their marketing formula first.
Even ignoring the fact that most companies/businesses don’t have the resources for that sort of upfront spending (Ignoring that fact is kinda like saying, Let’s pretend gravity doesn’t exist when I jump of this cliff – regardless of whether or not you think gravity exists, it seems to be a pretty real phenomenon) or the consequences of spending huge amounts to acquire some customers vs others (Don’t you get annoyed when your bank offers free computers or ipods to people who open a new account when you have been with the bank for 20 years), most companies and by most, I don’t mean Fortune 500 companies, I mean Fortune 500,000 companies (you might even be a Fortune 2,000,000 company)…..don’t know their customer acquisition costs or have a systematic marketing plan, so suggesting that you just go out and spend the LTV of a customer on the next 10 prospects that walk in your door is a little Utopian.
So what’s the moral of the story here……..
Before you go out and spend big bucks to acquire a customer, you should actually have an idea of what sort of bucks you should be spending in the first place
Jim does a much better job of operationalizing this concept into a usable form for business………..3 cheers for Jim!!!!