Balancing Customer Acquisition and ROI
When times get tough, the tough go after customer acquisition!
Customer acquisition is an expensive proposition. Catalogers will spend 60 cents per mailing, plus another 6 cents with their favorite co-ops or 13 cents to rent names from their favorite competitors. So when the economy causes a 20 percent drag on customer acquisition segment performance, it seems to make sense to cut customer acquisition from the budget.
In the short term, cutting unprofitable customer acquisition makes sense. Your business is instantly more profitable after cuts than before cuts.
The marketer focused on return on investment always compares long-term value with short-term profitability. It's when comparing long-term value with short-term profitability that you learn how important it is to be willing to lose money acquiring customers.
Let’s think about a customer acquisition segment: You acquire 10,000 customers and lose $250,000 in profit by acquiring these customers. Intuitively, it makes sense to not mail this list in the future.
But what would you do if I told you that these 10,000 customers will generate $300,000 profit in their first 12 months as customers, then an additional $150,000 profit in year two and $75,000 profit in year three? Would you be willing to lose $250,000 profit next month, knowing that in the next year you’ll make $300,000 profit?
Many companies are willing to lose money acquiring new customers, as long as the profit is more than made up for within 12 months.
It's when the payback period is longer than one year that they tend to become worried about losing a lot of money. Say you lost $400,000 to acquire 10,000 customers. Would anyone be willing to absorb this loss if you knew that you’d get $300,000 profit back in year one, $150,000 back in year two and $75,000 in year three? Here, the payback period is just less than two years. Are you willing to absorb a significant loss right now in the hopes that these customers will pay you back in the next two years?
Many companies run simulations, comparing how a business will grow when managing break-even customer acquisition activities vs. activities calibrated for a one-year payback vs. activities calibrated for a two-year payback. A business grows much faster when accepting a one- or two-year payback. Profit grows faster when accepting a one- or two-year payback. Profit, as a percentage of net sales, is greater when managing customer acquisition activities to breakeven or better.
There’s nothing wrong with cutting customer acquisition activities down to breakeven or better, especially if cash is tight. If you can afford to spend a little bit more, balance the short-term loss with the long-term profit your newly acquired customers will generate.