February 24, 2016

Proper Investment Levels

We frequently hear that most companies do not perform lifetime value calculations ... and those that do tend to largely ignore their own studies and instead invest to a twelve-month break-even (this is what I did at Nordstrom, and what I did was wrong).

The right thing to do, of course, is to run a multi-year simulation, where you calculate the amount of incremental profit generated by each level of investment.

In this example, it is clear that if you want to maximize one year value, you are willing to spend $40 of marketing expense to acquire a customer, but no more.

But if you want to do what is right for your business in Year Ten, you are easily willing to invest at least $80 of marketing expense per new customer. Your business is nearly twice as large, and profit is almost fifty percent greater.

Now, your CFO may not be willing to invest this much money, and that's fine ... but your CFO should at least be made aware of her options, don't you think?

Send me an email message (kevinh@minethatdata.com) if you need help setting up your multi-year simulation of long-term growth and long-term profit.

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