February 25, 2018

Customer Acquisition: Interplay Between Metrics

Here's a common problem ... we manage a business where customers have minimal long-term value.

Think of it in terms of twelve-month future value, let's simplify for a moment. You acquire a new customer. Here are a handful of scenarios:


Scenario #1:  30% Rebuy Rate, $120 future spend per repurchaser, 60% gross margin, 15% pick/pack/ship expense, $8 of annual marketing expense.
  • Profit = 0.30 * 120 * (0.60 - 0.15) - $8 = $8.20.
Scenario #2:  30% Rebuy Rate, $120 future spend per repurchaser, 50% gross margin, 15% pick/pack/ship expense, $8 of annual marketing expense.
  • Profit = 0.30 * 120 * (0.50 - 0.15) - $8 = $4.60.
Scenario #3:  30% Rebuy Rate, $120 future spend per repurchaser, 40% gross margin, 15% pick/pack/ship expense, $8 of annual marketing expense.
  • Profit = 0.30 * 120 * (0.40 - 0.15) - $8 = $1.00.
In a low rebuy rate environment with low annual spend per repurchaser, gross margin become critical to long-term value.

Look at this scenario:

Scenario #4:  20% Rebuy Rate, $500 future spend per repurchaser, 30% gross margin, 15% pick/pack/ship expense, $8 of annual marketing expense.
  • Profit = 0.20 * 500 * (0.30 - 0.15) - $8 = $7.00.
High future spend offsets low repurchase rates and low gross margin dollars.

One more scenario:

Scenario #5:  50% Rebuy Rate, $400 future spend per repurchaser, 25% gross margin, 15% pick/pack/ship expense, $8 of annual marketing expense.
  • Profit = 0.50 * 400 * (0.25 - 0.15) - $8 = $12.00.
When gross margins are low, you need high annual spend and high repurchase rates (think Amazon) for the long-term profit equation to work out well.

Measure how all of your metrics interact. The interplay between repurchase rate, annual spend, and gross margin yields long-term value ... and ultimately determines whether you need a low-cost / no-cost customer acquisition program.

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