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.

Can I Show You Something?

One of the most successful companies I've ever been associated with operates stores and e-commerce. Here are their counts of "omnichannel" buyers in the past five years ... defined as 1+ purchase in e-commerce in the past year and 1+ purchase in-store in the past year. Tell me what you observe.

• 2022 = 15%.
• 2021 = 17%.
• 2020 = 8% (Covid year, stores were not open for 6 weeks).
• 2019 = 18%.
• 2018 = 19%.

This brand grew significantly over the past five years.

This brand nearly doubled annual profit in the past three years.

The percentage of customers who buy from stores and online decreased over time, albeit modestly.

This brand technically becomes more successful as it generates fewer customers who buy from both stores and e-commerce in the same year.

There are many ways to be successful in business.

You don't need to do what trade journalists and research brands demand of you.

Instead, sell your best customers stuff they love and acquire customers at a cost that allows you to generate a ton of profit in the next few years. Do that and you'll be just fine.

Future Value

This is a graph I create for my client base when they request a File Power project. I measure future sales as a function of time since acquisition.

The relationship (in this case) looks nearly linear - it is not, but it is one where the customer keeps spending money year-after-year.

Here's the relationship, summarized in tabular form.

Tomorrow we'll extend the table to profit. This company is a good one - there is sufficient downstream profit to grow this business via customer acquisition.

You likely produce this table for your company. The table (and the one I'll share tomorrow) form the basis for your investment strategy. 

A Version of the 80/20 Rule

Here's the share of next year's sales from existing customers (y) as a function of customer file quality (0.1 = great customers, 1.0 = worst customers).

4% of the customer file delivers 29% of next year's housefile sales.

20% of the customer file delivers 65% of next year's housefile sales.

50% of the customer file delivers 88% of next year's housefile sales.

This client needs to take the top 4% of the housefile and do SOMETHING to reward them. Not points. Not a loyalty program. Something meaningful.

I mean, the relationship above is for sales. When I plot profit? Woo-wee!

Having great customers helps your customer acquisition efforts. Great customers generate so much profit that their profit rolls into your long-term value calculations - and long-term value dictates how much you can spend to acquire a customer.

It's all circular, and it's all important.

Email is Different

Yesterday I talked about digital marketing in general, and the fact that one business generally attributed digital marketing efforts to either the very best customers or new customers.

Email is different. For the same business I discussed yesterday, here's what I learned.

• 31% of email sales were attributed to the best 4% of the customer file.
• 61% of email sales were attributed to the top 16% of the customer file.
• 5% of email sales were attributed to new customers.

The 61/16 ratio cited above is not uncommon. You're using a virtually free marketing channel to speak to your best customers.

Here's a fun one for you ... I once analyzed the results of an email mail/holdout test. In the mailed portion of the test, customers were much more likely to have orders attributed to Search and Facebook and Display. The very act of enticing a customer to buy via email marketing caused customers to presumably comparison shop elsewhere, touching other channels (and racking up additional expense) before (maybe) purchasing. In other words, email marketing was not virtually free. Email marketing caused expenses to increase in other channels.

Isn't that fun!

Email, as you already know, is entirely different from every other form of marketing. Give it 3% of your mental bandwidth and miss out on File Power, profit, and the audience that it serves (i.e. your best customers).

That's How We Get Our New Customers

At least that's what the Executive said when I asked him about various online marketing tactics.

A look at his customer file told a different story.

• 19% of his digital marketing budget was attributed to the top 4% of his customer file.
• 31% of his digital marketing budget was attributed to the 5th percentile to the 24th percentile of his customer file.
• 24% of his digital marketing budget was attributed to new customers.

In other words, it was the very best customers consuming online marketing tactics, or new customers consumed online marketing tactics.

Sometimes we just miss the point of everything we're doing. We're not "bidding on a keyword". I mean, that's the tactical thing we're doing. What is the strategic thing we're doing? It's like we're Billy Beane in Moneyball yelling at the scouts "What's the problem we're trying to solve?"

We're trying to increase File Power. And for some reason our best customers know we sell widgets and are out there on Google searching for widgets anyway. What's the problem we're trying to solve when that happens?? Once you answer that question, the tactics employed to solve the problem are different than "bidding on a keyword". Obviously. We just don't ever want to answer the question, do we?

File Power In Practice

So I'm exchanging emails with a digital marketing expert - this person is excited because he acquired new customers at a $10 ROAS.

Now, I already knew the answer (as do you), but I asked the expert if that was a profitable outcome?

His response? "I don't know. I just know that's a good ROAS".

In practice, you have an existing customer base. The existing customer base is capable of spending "x", you'll spend "y" marketing to the customer, yielding "z" dollars of profit.

Profit is a function of the life stage the customer is in. Somebody acquired customers five years ago, and the work that somebody performed back then ends up in your pocketbook via a bonus today, because those customers keep generating profit.

In practice, we want a powerful file. We want as many customers as we can afford, and we want them to generate as much subsequent profit as they can possibly generate. When we figure out ways to generate more profit out of a customer, we are allowed to spend more money acquiring customers ... this behavior is circular because then we have more customers, generating more File Power, allowing us to acquire even more customers.

In my projects, I keep seeing instances of companies that cannot acquire enough new customers to grow. This seems like a Customer Acquisition problem (and it most certainly is a Customer Acquisition problem), but it is also a Customer Loyalty problem. When we cannot figure out how to generate more profit out of a customer, we have to back off on Customer Acquisition to make sure we generate enough short-term profit. Our Customer Loyalty problem accelerates our Customer Acquisition problem.

What drives Customer Loyalty more than anything else?

Merchandise Productivity.

In other words, there's a lot of interconnected pieces. If we take our eyes off of any one of the connected pieces, we lose profit, which hurts our ability to acquire new customers, which shrinks the customer file, which lowers File Power, which costs us more profit, and the circular problem continues iterating through the business.

Everything we do impacts File Power.

So yeah, we want to study File Power, don't we?