When A Business Has Long-Term Potential

There are things that are somewhat easy to fix.

When I see a business that needs 300,000 new/reactivated customers and is only acquiring 200,000, I usually see a marketing problem that can be fixed. The client may not see the problem that way, but it's a tactical issue that can be resolved.

Businesses that have long-term potential have a signature other businesses don't have. Long-term potential businesses acquire customers that generate plentiful downstream profit. I can also tell if the business has smart marketing/analytics employees ... if the business acquires customers who generate plentiful downstream profit, smart employees compensate by acquiring customers at a loss (or as a proxy their customer acquisition efforts have an unnaturally low ROAS).

Business Without Long-Term Potential.

• Customer Acquisition ROAS = 4.00.
• Profit on Acquisition Transaction = $2.00 per customer.
• Year 1 Downstream Profit per Customer = $4.00.
• Year 2 Downstream Profit per Customer = $2.00.
• Year 3 Downstream Profit per Customer = $1.00.

Business Without Long-Term Potential, Managed for Short-Term Profit by Smart Marketers/Analytics Professionals.

• Customer Acquisition ROAS = 8.00.
• Profit on Acquisition Transaction = $12.00 per customer.
• Year 1 Downstream Profit per Customer = $4.00.
• Year 2 Downstream Profit per Customer = $2.00.
• Year 3 Downstream Profit per Customer = $1.00.

Business With Long-Term Potential, Well Managed by Marketing/Analytics.

• Customer Acquisition ROAS = 2.00.
• Profit on Acquisition Transaction = ($10.00) per customer.
• Year 1 Downstream Profit per Customer = $15.00.
• Year 2 Downstream Profit per Customer = $11.00.
• Year 3 Downstream Profit per Customer = $8.00.

The first business is one you don't want to acquire. Management doesn't know what they are doing. Marketing/Analytics don't understand the importance of profit.

The second business is worth considering only because smart people work there. It's the same business! However, the marketing/analytics folks generate enough profit acquiring a customer ... they understand that the customer doesn't have long-term potential ... so they optimize the business to make it profitable today. The buyer is purchasing "smart people" in this instance.

The third business is one that Private Equity or smart professionals want to purchase. ROAS isn't low because it's low ... it's low because marketing/analytics over-invest in new customers, losing money on the acquisition transaction to net out handsomely over three years. The owner of the first business would gladly lose $10.00 to profit $34.00 over three years ... but she can't do that because she sells merchandise that customers don't want often enough to generate future profit.

All of these dynamics are determined by "what" the brand sells. If you sell something that can be purchased year-round and the customer wants to buy it 2-3 times per year, you have the third business. If you sell something the customer only needs once every-three-years, you are managing the first business or the second business.

The first/second business cannot be fixed by the marketing/analytics folks ... it can only be optimized. The first/second business has a merchandising problem - the business is selling merchandise that customers don't want often enough to generate sufficient profit.

If you are wondering ... yes ... consultants see the first/second business every single day. Try telling the Chief Merchandising Officer that he isn't selling merchandise that customers want often enough to generate sufficient profit.