October 09, 2011

Death Spiral: New Customers

New customers are one of the primary harbingers of a business that is about to slip into a death spiral.

Pay close attention to cost per new customer.  When a business is about to struggle, cost per new customer begins to inflate.  Maybe you acquire customers at $30 per newbie, and then, for whatever reason, you're acquiring customers at $36 per newbie, and you're acquiring 10% fewer new customers.

This is a classic sign of a business entering a death spiral.

We all respond to this by "attacking the problem".  We reduce a catalog from 96 pages to 88 pages, to save money to cover the cost per new customer problem.  We spend $0.50 per click instead of $0.55 per click, in order to cover the cost per new customer problem.  And we argue that we "must improve loyalty" if it is hard to acquire new customers.

Instead of focusing on tactics, we need to elevate what we're seeing to Management.  We need to tell a story.  In the future, all of us need to become much better at creating awareness without big expenditures.  For catalogers, this is the opposite of buying names from a co-op.  We need to create ways to be top-of-min, so when the customer is ready to buy something, we're being considered.

Always keep in mind that Cost per New Customer changes signal entry into the Death Spiral.