Great companies use this approach to cut their cost per acquired customer in half and generate a positive return. Can it work for you too?
A financial services client of ours is spending several million dollars per year on marketing to their customers. This breaks down to an average of $40 to sell each new product—and that’s just to get the customer to ask for the product. The company spends additional dollars on closing the sale and providing the product.
Let’s break down their numbers and see how they might improve the effectiveness of their spend and decrease their cost per product by following four simple rules. These rules apply to any business looking to get more out of its marketing spend.
Rule No. 1: Bring a Rifle to the Hunt, Not a Shotgun
Contacting a potential customer with a marketing “impression” is not necessarily very expensive. A direct mail campaign might cost as little as a few cents per impression for an insert in an existing mailer, or a dollar or more for a catalog. Our client’s mailers cost roughly 20 cents per impression.
The client targets a very broad range of potential customers. This “shotgun” approach shows in their results: Their efficacy is only 0.1 percent – 0.3 percent, which means they must reach between 300 and 1,000 potential customers for each customer they acquire. This is how 20 cents per mailer translates into $70 per new customer acquired.
Better targeting would improve their results. They already have a wealth of historical customer data that can provide telltale information on which potential customers are ripe for purchase. For example, when a customer gets married their purchasing patterns change dramatically. Targeting customers based on recent behaviors and life events can dramatically increase their “hit rate” and lower their cost per customer acquisition.
Rule No. 2: Make Them an Offer They Can’t Refuse
Tailoring existing products or creating new products for customer niches can be expensive, but the payback may be worth it. By better understanding their customers’ life stages and purchase patterns, our client can take the first step toward treating their customer base not as a monolithic whole, but as a collection of niche markets with different needs and behaviors.
The second step is to tailor product offers to those niches, using the four Ps (Product, Place, Price, Promotion) to create offerings that are appealing to a given niche.
Rule No. 3: Hit Them Hard When They Are Ready to Buy
With the right product at the right price and a promotion tailored to an attractive niche, our client must be relentless in reaching out to potential buyers at the right time—when they’re most inclined to buy. A typical window during which a potential customer is willing to buy lasts from six months to two years. If our client does not convert them in that time period, the prospect is likely to either choose a competitive offering or decide not to purchase.
Therefore our client needs to redirect their marketing spend toward making repeated impressions on these customers. By better targeting high-potential customers, the client can redirect spend away from lesser prospects, thus improving their campaign effectiveness without increasing overall spending.
Rule No. 4: Experiment and Learn to Improve Your Mental Model of the Customer
Our client’s ability to predict a customer’s “ripeness” (willingness to buy) and “sweetness” (potential lifetime value) can be improved by taking a more experimental approach to the market. This requires:
Running pilots of different marketing messages and four P (Product, Place, Price, Promotion) combinations
Measuring the results of each pilot, uncontaminated by other marketing programs
Analyzing the data deeply to extract the desired learnings
Investing in ways to lower the cost of running these types of pilots
Sharing the learnings across the organization
These rules and actions are all easier said than done, but they can be a key source of value. By investing in this approach, our client may be able to cut their cost per acquired customer in half and generate a positive return doing so. Great companies use this approach to marketing to create a sustainable competitive advantage. Can it work for you too?
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark