Marketing Mistake #3 – Not knowing the life time value of your client

Picture this:

Mr. X and Mr. Y both run local carpet cleaning businesses. Both ran a direct mail campaign to their local neighborhood. Both received a 1% response out of 100 letters mailed. Thus they received 1 client out of their campaign. 

The cost? A grand total of R300 to send out the letters. The client they got through their efforts spent R299 on each of their services respectively. 

Here’s the big question: Did they make or lose money? On the face of it, the campaign flopped (sort of like the first pancake I ever made – that thing looked liked potato mash sown together with the pan). But my point is this:

Mr. X thought, because his marketing efforts did not make any money initially, he would yank the life cord out of the heart of the campaign. 

Mr. Y was smarter. Instead he knew that for every client he spent a measly rand for – he would accrue R2500 in back end services. In others words, those clients would return to him, year on year to get their carpets cleaned.

No, Mr. Y was even smarter than THAT. He knows every one of his clients will refer at least one of their friends, family or co-workers to him. And he knows that this will eventually create a chain link of referrals so that he will never ever have to lick, stamp and mail letters to get customers. 

Can Mr. Y get any smarter? You betcha. Mr. Y also knows if the recession hits he can turn on his client getting machine anytime he wants to and get R2500 over and over again. 

What happened to Mr. X?  He struggled to get business. He muddled along, trying to make ends meet. Eventually the rising fuel costs, employee unions and dozens of hidden costs squeezed him out of a business.

Even though this story is fictional, it makes one crucial point:

Know the marginal net worth/life time value of your clients. 

You might spend a R100 to get a R1000 sale or R10 000 to get a R100 000 sale – it doesn’t matter. If you know the cost of acquisition (CPA) in your business, the more control you will have over your marketing efforts. And the more empowered you will become to make intelligent marketing choices to fend off fly by night competitors.

You see, only by crunching the numbers will you have a bird’s eye view of what’s really going on in your operation. Know your cost per acquisition, know your average client life time value, know the amount of transactions your clients will do with you per year.

Knowing this will eliminate the #1 business killer:

Guessing!

Let me leave you with a quote from one of my favourite marketing mentors, Sir Gary Halbert – “you are not in the business of response, you’re in the business of arithmetic”