August 10, 2022

At The Lowest Possible Cost

Most of the e-commerce businesses I analyze show a downstream profit profile that looks something like this:

  • Year 1 = $14.
  • Year 2 = $9.
  • Year 3 = $5.
  • Year 4 = $3.
  • Year 5 = $2.
  • Five Year Total = $33.

This profile dictates your customer acquisition strategy. You simply cannot invest in expensive new customers because you never generate enough profit to fuel future success. Your new customers need to be profitable, or acquired at a small loss. You might be able to afford to lose $10 profit acquiring the customer because you make up $33 after five years, but not much more.

The profile above happens when you have a 30% or worse annual rebuy rate. Your customers have no loyalty (usually because they don't need to buy from your merchandise assortment on a frequent basis - it isn't because the customer isn't loyal - it's because you sell something with an infrequent purchase frequency), therefore they generate minimal future profit, meaning you can't spend much money acquiring customers, suggesting you must have a strong owned/earned marketing strategy.

Look at this business ... about 20% of my clients fall into this scenario.

  • Year 1 = $18.
  • Year 2 = $16.
  • Year 3 = $14.
  • Year 4 = $12.
  • Year 5 = $10.
  • Five Year Total = $66.

This business can afford to spend a ton of money acquiring customers! This business could afford to lose $40 profit acquiring a customer because the payoff is certain and generous. This is the kind of business that can afford paid media.

If you don't get long-term payback, you need a strong owned/earned strategy.

If you get a ton of long-term payback, you can pay Facebook/Google forever.

For most of us, we need to acquire customers at the lowest possible cost.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

You Were Warned Back In Early Spring / Summer

I told you earlier this year that what is coming in 2023 isn't going to be pretty. I sure hope I am wrong. I maybe have a 35% chance of ...