Do you know how much of your business’s resources you allocate to marketing and new customer acquisition? Most importantly, do you know how much you should be spending and at what value it becomes un-economic?
Most small businesses use a combination of guesswork, perceived funds available and gut feel to set their marketing budgets. In this latest instalment of Strategies for Growth we aim to help business owners understand the lifetime value of new customers and enable them to take a longer-term and more reliable view of attracting new business to make their companies more effective and profitable.
We have already looked at the fact that the most cost-effective use of marketing funds is to sell more to existing customers. It is generally recognised that acquiring new customers costs between 4-to-6 times more. Copy-repeat business is even cheaper, where the same customer comes back to you repeatedly, to buy the same item for the same (or similar) price with no additional marketing spend or price negotiation at all.
However, this is not always possible, or indeed the best option for the business. There are times in any business’s development when new customer acquisition rightly becomes the focus for growth. There may be strategic reasons for wanting this, such as diversification of the customer base, market share growth and shifting into a different market. However whatever the reason, resources need to be spent attracting new customers. The question is: how much?
The Loss Leader
Most business managers understand the concept of the "loss-leader," whereby an initial product (typically highly advertised – high marketing spend) is sold cheaply to attract a customer into shopping, on the basis that the overall value of their purchases makes up for the initial loss. Supermarkets are famous for this.
Because the overall value of the customers' shopping is profitable, it was worth taking a potential loss on some items to ensure the rest of the purchases. Other examples of this principle include music and book clubs that give the shopper a cheap incentive to join, with an agreement to buy further full price items. The setting of the marketing or advertising spend and pricing structures is not made by accident but by careful and considered calculation. So, how do these companies know where to price their goods, and on the basis of what payback?
