How Much Should You Spend to Acquire New Buyers?
When looking at your income statement, it’s tempting to cut prospecting to save money. But is that really the right thing to do?
You have to invest in converting prospects to buyers. How much to pay for a new buyer depends on what you can afford and how fast you want to grow.
Overspending to acquire a new buyer and trying to grow too fast can lead to financial ruin. On the other hand, not investing in housefile growth can have a negative effect on your business. This month I’ll examine how much to spend to acquire a new buyer.
Invest to Grow
Some catalogers say they don’t want to prospect below the incremental break-even point (net sales less cost-of-goods-sold less direct selling expenses) on a cumulative basis. They want to be sure all prospect lists they mail perform at least at breakeven or more.
While that’s a good goal, this philosophy can limit growth severely, because it’s unlikely you’ll find enough good lists that perform above breakeven to sustain a desired level of growth or even maintain the same sales from one year to the next. You must be willing to invest in acquiring new buyers. This can be accomplished only by mailing below the incremental break-even point.
The real question is, how far below? And how much should you spend for a new buyer? What’s a reasonable payback period for the investment you make?
There’s a certain attrition rate on any housefile. Customers stop buying for myriad reasons: economic conditions, poor service, older customers who pass on. It’s important to at least replace those customers with fresh buyers so your zero-to-12-month file doesn’t decline. If you want to grow, your prospecting amount must exceed your normal housefile attrition rate.
For example, let’s assume 50 percent of a typical customer file will purchase again next year. At a minimum, you must replace the 50 percent who don’t buy so the active housefile doesn’t decline. This includes a combination of adding new buyers and bringing previous buyers onto your zero-to-12-month file. If you want to grow, your percentage of new-to-files has to be even higher than your normal attrition rate.