October 26, 2015

But That Path To Loyalty, I Can Greatly Influence It With A Postcard Or Retargeting Effort, Right?

Here's the challenge most of our businesses face.
  • 12 Month Probability of a 1st to 2nd Purchase = 30%.
  • 12 Month Probability of a 2nd to 3rd Purchase = 50%.
  • 12 Month Probability of a 3rd to 4th Purchase = 60%.
Yup, in 7 of 10 cases, this is what it looks like. It typically takes four purchases before a customer can even be thought of as being "loyal". Now, I get it, some customers purchase after 37 months blah blah blah ... but for the sake of argument, let's just multiply out the numbers above for 1,000 sample first-time buyers:
  • 1,000 * 0.30 * 0.50 * 0.60 = 90.
There you go.

You acquire 1,000 customers, and 90 become "loyal". Throw in all of those lapsed buyers who eventually purchase, and maybe you get 150 buyers to become "loyal" ... eventually ... and it takes three years to get there.

Three years!

And you only get 150 of 1,000 customers to a state of "loyalty".

Now let's pretend that you have some sort of amazing postcard or email or campaign-centric program that you beat your customers over the head with on a weekly basis, incremental to everything else you are doing. You might bump that 150 number by 5% ... another 7.5 customers.

Do you see why most loyalty efforts are a colossal waste of time?

Why not spend the same amount of energy and money finding a new customer instead?


4 comments:

  1. Anonymous3:01 PM

    Common wisdom is to tap your existing customer base, because, "It's cheaper to sell existing customers than to acquire new ones." Under what conditions would you focus on existing customers? Under what conditions would you focus on new customers?

    ReplyDelete
    Replies
    1. You always focus on new customers.

      When existing customers have an annual repurchase rate > 60%, that's when you focus on existing customers.

      Delete
  2. Really? Isn't there an opposite equation proving how costly a new customer costs?

    ReplyDelete
  3. You have to run long-term simulations to understand how much to spend on a loyal customer vs. how much to spend on a new customer. Having run these simulations since 1990, I come to the conclusions above.

    What do your long-term simulation runs tell you about the relationship between new/existing customers, for your business?

    ReplyDelete

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