February 21, 2010

Dear Catalog CEOs: New Customers

Dear Catalog CEOs:

Sometimes, folks view the work I do as being "theoretical" or "professorial" ... there isn't a direct connection between what I'm talking about and helping your business grow in an actionable way.

So let's take a step back, and review simple concepts that can immediately grow your business, starting tomorrow.

For the past three years, I've analyzed close to fifty different direct marketing businesses. You send me your customer data, sometimes going back ten to fifteen years, and I then analyze how your customers are migrating across channels. I analyze how "loyal" your customers are, measured by a metric called "Annual Retention Rate".

When I average all of the businesses I've analyzed in the past three years, I observe the following:
  • 39% of the customers who purchased in 2009 will purchase again in 2010 --- this is called the "Annual Retention Rate", and is the most important loyalty-based metric you can calculate.
  • 18% of the customers who last purchased 13-24 months ago will purchase next year.
  • 9% of the customers who last purchased 25-36 months ago will purchase next year.

What does this mean? Well, it means that, on average, we don't retain our customers. Our customers are not loyal to us.

Here's an example. Assume you have 10,000 customers who last purchased in 2009, 6,100 customers who last purchased in 2008, and 5,000 customers who last purchased in 2007. How many customers will purchase in 2010?

  • 2010 Buyers = 10,000 * (0.39) + 6,100 * (0.18) + 5,000 * (0.09) = 5,448 Buyers.

Now, in order to maintain the quantity of 10,000 buyers that you had last year, you need 4,552 new customers.

At this point, the blogosphere and the Twitterati, people who in most cases haven't had the benefit of running a business, will tell you that it costs eight times more to acquire a new customer than to keep an existing customer. They'll ask you to do things that improve customer loyalty. Much of the advice, of course, is based on personal preference and opinion. If there were easy ways to increase customer loyalty, everybody would be doing it and loyalty would dramatically improve and the economy wouldn't be a mess, right?

But let's assume that you magically find a way to increase customer loyalty by 15%, across the board. Now how many buyers do you need to acquire in 2010?

  • 2010 Buyers = 10,000 * (0.39 * 1.15) + 6,100 * (0.18 * 1.15) + 5,000 * (0.09 * 1.15) = 6,265 Buyers.

So that's a good thing ... assuming, of course, that you know of some magical set of tactics that nobody else discovered yet, tactics that allow you to immediately improve customer loyalty by 15%.

If you have that magical formula, then you only need 3,135 new customers to keep your customer file flat.

And if you have the magical formula for customer loyalty, then you won't be content with keeping your customer file flat to last year, will you? Of course not! You'll want to grow by 10% or 20% or 30%. And in order to do that, what do you need?

More new customers! So you'll continue to try to acquire at least 4,600 new buyers, won't you?

If there is one actionable thing I can tell you to focus on, it is this:

Focus a disproportionate amount of time and energy on finding new customers.

It's that simple, it is completely actionable, and it is largely within your control. Every one of your marketing staff members should be tracking new customer counts. Don't pay an annual bonus to your marketing team unless your marketing team increases the number of new customers within lifetime value constraints.

For many, customer acquisition opportunities have been maximized in offline channel. Your co-op isn't going to develop a model that increases customer acquisition counts by 30%. And there isn't a magically productive list out there just waiting to be rented.

The obvious answer, then, is to find ways to acquire new customers in your online channel. This doesn't always mean that you have to pay/advertise to acquire new customers. A simple 5% improvement in conversion rate could do the trick, assuming that you have projects on your book of work that would solve your conversion rate problems. Think of all of the traffic that you drive with offline/catalog marketing, traffic that doesn't convert. Is that the fault of your catalog marketing activities, or is that the fault of your website?

And if it is the fault of your website, then why is 75% of the time often spent improving catalog marketing performance?

Acquiring new customers is the single most important thing a marketing department can do to improve business performance. If you want something actionable to take back to your marketing team, make the majority of their annual bonus payment dependent on acquiring significantly more new customers within lifetime value constraints, and force them to improve customer acquisition performance via the online channel. Then give them the resources to accomplish the mission. I'm confident you'll see an uptick in business performance!

7 comments:

  1. I like your formula and I like the concept of growing your business as express in this article.

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  2. Well that makes two of us!

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  4. But these figures....

    Depend on product lifecycle, eg. one vs many choices per year I believe...

    ...and your company product ecosystem? If there's a new model, worthy improvement etc. Like how I decide if I want a new iPad 3.

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