June 05, 2023

The Customer Has No Value

Back in the days when clients paid money to have you on campus, there were times when a CEO or Marketing Executive just wanted to "touch base". I learned early in my consulting work that "touch base" sessions needed to be expensive. You don't charge $900/day to have somebody yell at you for eight hours. The key was to charge just enough to encourage a handful of "touch base" sessions but to dissuade the large number of sessions where somebody wanted to yell and was "frugal". Yelling/Frugal is a bad combination. If you want to yell and are frugal, I'll let you do that via Zoom for free.

"Frugal" is a bad word when it comes to customer acquisition.

One such CEO ... a catalog CEO ... wanted to discuss "customer acquisition theory". Theory is also a bad word, as it implies that the CEO can never be wrong because s/he is simply discussing theory. In this case, the CEO was frustrated that paid search customers had no value.

Here's what the math looked like:

  • New Catalog Customer = 35% Rebuy Rate, $170 Spend per Repurchaser, 40% Profit Factor, $12.00 Annual Marketing Expense, $11.80 Variable Profit in Year One.
  • New Paid Search Customer = 25% Rebuy Rate, $160 Spend per Repurchaser, 40% Profit Factor, $10.00 Annual Marketing Expense, $6.00 Variable Profit in Year One.

He presents this data-driven argument, tells me that the Paid Search customer has "no value", and wants to abandon paid search.

He is wrong, of course.

Just because a customer is less valuable doesn't mean that a customer is not valuable. The customer is simply different.

The CEO became frustrated. "Why would I acquire a customer worth half as much as my catalog customers?" I answered "Because the customer generates enough variable profit to offset fixed costs." This was apparently the wrong answer to offer during a "touch base" ... the CEO became more upset. "This customer won't even buy from my catalogs." I told the CEO that "You don't care if the customer purchases from your catalogs, you only care that the customer purchases." Visibly angry now, the CEO says "What am I supposed to do, acquire two lousy customers to make up for one catalog customer?" I replied "yes".

Here we are, in 2023. A fusion of low co-op response and a paper industry charged with destroying the expense structure of a catalog that resonates among customers age 60+ mean that it is terribly hard to acquire new customers via print.

The choice is to now acquire two customers at $6.00 each instead of one customer at $11.80. The customer that has no value is now "the" customer. On Maslow's Hierarchy of Needs, we're moving toward Acceptance.

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