Along with being exposed to the latest cool gadgets, working in the technology sector gives me a front-row seat to new business practices long before they become mainstream.
I’ve been awed by the marketing revolution that’s upon us. The Internet has changed buyer and seller behaviour everywhere, and the resulting New Marketing really is new.
While businesses normally address such key factors as product, team, market and product/market fit, they’re often blind to the biggest business threat: the high cost of bringing in sustainable business.
In New Marketing, the key concern is ensuring that customer acquisition costs (CAC) are balanced to lifetime value of the customer (LTV). Put simply, this is the ratio of cost to acquire new customers (CAC) over the ability to monetize those customers during the business relationship (LTV).
It sounds profitable to be able to extract $300 value from every $100 spent selling, but if it took five years to get that $300, you’re dead. But earn that $300 back from a $100 cost within three months, and you have a profitable business, for cheap. The time difference is critical in terms of valuation and viability.
Boris Wertz, Vancouver angel investor and co-founder of GrowLab, believes it’s about the Internet-enabled market knowledge.
“Companies that succeed are those with enough scale to develop reliable information and act on it. Traditional retail businesses don’t understand buyer behaviour well. We’re seeing much more online-to-offline communications, such as Groupon, where information becomes deeper, more trackable, more useful.”
New Marketing uses “inbound” marketing to help prospects “find” their business online. They depend on the Internet to drive lead flow, using tactics that inform and entertain us – all contributing to a “viral” spread.
You probably “buy” this way: avoiding chats with salespeople, you prefer to do your own online research, read blogs or reviews, consult your social networks.
This is a marked contrast to Old Marketing’s expensive, “outbound” tactics that push often unwanted streams of promotion out to prospects.
Entrepreneurs are inherently optimistic and zealously believe customers will love, and buy, their product. So they often grossly underestimate the cost of acquiring customers.
True viral growth is rare. It happens only when the offering is sexy or visually exciting.
Typically businesses must attract customers with such techniques as SEO, Google Adwords, SEM, PR, social marketing and various sales methods – all driving CAC skyward.
And while these high costs shock the entrepreneur, they faint when faced with the huge cost of direct sales.
CAC skyrockets when a human touches the sales process – from “light” email followup or webinars to “heavier” demos or sales calls – by $300 to $5,000 per customer acquired, depending on touch level.
With LTV, it’s about sustaining and increasing relationship value, ensuring a continued payment stream that increases in worth over time.
Maintaining customer contact is sure to magnify lifetime customer value.
Wertz points out that “new mobile loyalty programs let businesses maintain valuable digital conversations with customers.”
Today, the best customer acquisition practices are to:
•leverage all online tools to be easily “found” by prospects and drive viral reach;
•heavily automate and default to zero-touch lead conversion and sales processes; and
•data mine all aspects of customer acquisition and incessantly improve it.
To calculate CAC, take full sales and marketing costs and divide by the number of customers acquired during the period being surveyed. To calculate LTV, use the gross margin expected from that customer lifetime, considering all support and service costs.
The business should be viable if it balances its CAC with the ability to monetize those customers (LTV) following two rules of thumb:
•a minimum LTV-to-CAC ratio of between 3X and 4X for recurring-revenue businesses; and
•CAC recovery within 12 months.
Once the business model is proven and the financing organized, jam down the accelerator pedal and invest every cent into New Marketing, grow the business fast and connect with customers before others figure out your game – and join it. •
