As a lifetime marketer, I’m a big fan of data. When I run marketing departments, one of my goals is to ALMOST eliminate opinion driven decisions, I like to stick with data-driven decisions if at all possible.
One of the places where it seems that there should be more data around the decision is the marketing budget. Often the marketing budget is determined by a percentage of revenue, or based on an offer for a cheap print ad, or sometimes just throwing a dart at a number.
Obviously there are a lot of different data points you could use. Whatever you decide, for the love of Humphrey, stick with that number so you have some consistency. For this particular diatribe though, we are going to focus on the lowly and boring Lifetime Value of a Customer (LVC).
Common wisdom states that it is always more expensive to bring in a new customer vs. keeping an existing customer so make sure you keep your existing customers happy, blah, blah, blah. Yep, got it. I want to talk about fun, glitzy stuff like getting new customers and how your LVC should apply to those efforts.
So, what is your lifetime value of a customer? I’m stunned at how many companies don’t know that. If this is your first time determining your LVC, I would recommend coming up with a range instead of either a hard number or a different number for every type of customer. You can get caught up in slicing your customers’ lifetime value by age, or location, or how they found you. If this is your first time, then don’t do that, start with a basic number range so you can at least get started. You can move into advanced math later. Come up with a low and high range that you feel comfortable with and then get it tattooed on your forehead, or maybe give your marketing coordinator a raise and have it tattooed on her forehead.
To get your LVC number, you need
- How often a typical customer purchases from you, like ever, their total number of purchases
- How much your average order size is
- Multiply the two together
Now that you have your LVC number, figure out what you are willing to spend to bring in a new customer. If your lifetime value of customer is $650 and you have margins of 50%, and you are hoping to spend no more than about 25% of your profits on marketing (every industry and company’s number will be different) then you should actually be able to spend around $81 to bring in a new customer.
See how much fun math can be? Now you have $81 to go spend on every new customer you bring in.
But wait, before you go spending $81,000 on cupcakes iced with your company’s logo on them, we’ll next talk about focusing specifically on the type of programs where you know (or are pretty sure) that you are reaching new customers. Do your LVC math and check back next week.