March 05, 2018

A Multi-Year Payoff Can Work, But Why Go There?

Here's a common situation.

Customer Acquisition Demand = $100,000.

Customer Acquisition AOV = $100.

Customer Acquisition / Customers Acquired = 1,000.

Customer Acquisition Marketing Cost = $80,000.

Profit Factor = 40%.

Profit = $100,000 * 0.40 - $80,000 = ($40,000). You lost $40,000.

Profit (Loss) per New Customer = ($40,000) / 1,000 = ($40.00).

Year One Housefile Profit = $22.00 per customer.

Year Two Housefile Profit = $13.00 per customer.

Year Three Housefile Profit = $7.00 per customer.

At the end of three years, your turn "profit positive".
  • ($40.00) + $22.00 + $13.00 + $7.00 = $2.00.
Of course, your paid search vendor loves this ... "YOU MADE MONEY ... KEEP SPENDING!" They say this, of course, because the lifetime value of your account goes sky-high when you keep spending.

You made $2 per customer across 1,000 customers, and it took you three years to get there ... $2,000 total.

You could have done this:
  • Put $80,000 in a savings account that earns 1% interest.
  • Year One Balance = $80,000 * 0.01 = $800.00.
  • Year Two Balance = $80,800 * 0.01 = $808.00.
  • Year Three Balance = $81,608 * 0.01 = $816.08.
  • Total Profit = $82,424.08 - $80,000 = $2,424.08.
So instead of looking for a three-year payback because your search vendor tells you it is a "best practice", how 'bout putting the money in a savings account that earns 1% interest and just sit back and do nothing going forward?

I know, I know, you'll tell me this is nonsense and you theoretically have more cash by constantly reinvesting $80,000 in customer acquisition activities. 

What's nonsense, of course, is that we let some (a minority) in the vendor community persuade us to do what is best for them. Why go down the multi-year payoff unless you've run the simulations to prove that this is the best way to spend incremental ad dollars?

You're run the simulations, right?

You know lifetime value down to the penny, right?

If the answer to both questions was "YES", then you know if you should go down the path of a multi-year payback.

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