Give first-time buyers a boost

Nov 01, 2007 9:30 PM  By

There’s an old joke about the devil being low on quota, so he decided to heavily promote special offers, free gifts and promises. With an immediate and overwhelming response, his quota was surpassed. The devil then began hearing complaints from buyers wondering what happened to all the wonderful promises. The devil replied, “You’re customers now — before you were prospects.”

If this story sounds familiar, you know there’s a bit of truth to the acquisition process. Marketers spend much time and resources to acquire new customers while they neglect to actively acknowledge current customers.

The problem is, typically, complacency with customer file management, as mailers focus on prospecting to acquire customers, with a separate emphasis on mailing customers. But if marketers aimed to aggressively turn first-time buyers into multibuyers within six months? The reason for the urgency is to recoup the cost of acquisition quickly and increase the likelihood of a multichannel buyer within the first six months of acquisition.

If you haven’t evaluated the marketing cost to acquire a customer lately, here’s the quick math. To illustrate, the example below identifies the variable costs to put the Spring ’07 catalog in the mail using the following categories: creative, print, postage, lists, data processing, and order form; you should also know the total print quantity.

Tip: If it’s too much trouble to isolate the variable costs, use the total cost to at least understand the methodology, then break out costs accordingly.

Once you identify the variable unit costs, the next step is to calculate the marketing cost to acquire customers. The nuance of finding the marketing cost is that it’s isolated from the costs for operations, call center, and cost of goods. You want to understand how much money it takes to recoup the advertising dollars spent. Start with a database query to find the number of first-time buyers from the Spring ’07 campaign as well as their corresponding revenue metric.

The cost category comprises the variable unit marketing costs of printing ($0.25); postage ($0.21); lists ($0.12); data processing ($0.04), and order form ($0.02) for a total unit cost of $0.64. Using variable costs is important because fixed costs — such as creative, photography, copywriting, color separations, print set up — all have to be done whether or not prospects are being mailed. The house file should carry all of the fixed costs.

Multiplying the total unit cost of $0.64 by the 50,000 prospecting quantity yields the $32,000 cost. Divide the cost ($32,000) by the number of orders (500) to reveal $64 cost to acquire. You see the $32,500 of revenue barely covered the advertising spent. Don’t panic — it’s rare that any cataloger can prospect profitably.

One way to minimize costs for a second contact is to use the outbound customer package. When you can identify the order from a first-time buyer, you have an opportunity to immediately market to that customer. The costs are limited to creative, printing and promotion — no lists or postage!

Some successful ideas include adding a thank you/welcome note with a $10 gift card; a letter with a general rebuy offer; and some companies even segment offers based on channel of purchase as well as product purchased, or if the order is delivered to a gift recipient. Depending on your system capabilities, you may have other ways to target customers.

Finding ways to take advantage of the first-time buyer shipment capitalizes on two opportunities:cost savings, since there’s no extra postage; and earning an immediate sale from the new customer. Here’s how this works: Continuing the earlier example, remember 500 new customers were acquired from the Spring ’07 campaign. If you identify a new customer as part of the order process, then the pickers in the warehouse can also pack the welcome note with a $10 gift card.

To evaluate if the costs justify the potential sales, calculate the following:

Customers: 500

Unit cost for the card: $0.50

Total cost for the cards: $250

Assume redemption rate: 10%

Assume average order value: $65

Forecast orders: 50

Forecast revenue: $3,250

Reviewing the information, you’ll see the cost is easily recouped. To identify the breakeven for the project, divide the $250 cost by the $65 assumed average order value. This reveals four customers need to place an order to cover the advertising costs.

Particular to gift cards and gift certificates, customers usually spend more money. This extra spend is often called “reach” or “stretch” dollars. If customers have a comfortable spending threshold of $65, a reach could be as much as 25%, or an extra $16.25. Monitor your customers’ performance to benchmark the reach dollars.

An added benefit of isolating the first-time buyers is to evaluate their second purchase. If the data reveal a majority of customers typically by widgets their second purchase, you may want to make a special offer to first-time buyers on multiple widgets or an upgraded widget.

If your operating system does not capture or isolate first and second purchase information, test different strategies. Don’t limit yourself to merchandise criteria — evaluate the channel of purchase. Catalog customers who purchased via the telephone are often good candidates to receive a promotion to make their next purchase from the Website.

Tip: Using the customer packages to garner another sale is not limited to first-time buyers. Other in-the-box promotions can be a sale flier or a catalog bounceback.

For example, one business-to-business cataloger saw a nice lift when the bounceback catalog had a “thank you for your order” wrap. Just the message alone doubled the response rate. (Yes, doubled.)

Looking at the first-time buyer segment as a whole, you’ll find it’s best to group these buyers into most recent year of purchase. Let’s assume the tally of first-time buyers is outlined as 700 year-to date 2007; 1,200 for 2006; and 1,300 for 2005. If you would like to include additional years, do so.

The next step is to separate each year into two groups: those with an average order value at or below your AOV, and a group who spent more than the company’s average AOV. Identifying the monetary spending helps isolate purchase behavior and allows you to better select mailings/promotions to target these groups.

If you are participating in a cooperative database, ask about modeling techniques to better identify general buying activity. With modeling, you can mail a targeted portion of the first-time buyers instead of randomly choosing a portion to mail.

If you’re not participating in a co-op, ask your data processing service bureau about their overlay products. Many times they have multiple resources for profiling data and scouring your first-time buyer file.

The third option is based on buying behavior. Current year first-time buyers should be treated like royalty — you should be cultivating the second sale. For the first-time buyers who spent less than company average, you may want to mail only sale catalogs or one catalog in the height of your strongest season.

Sale catalogs are often inexpensive to mail (compared to a non-sale catalog) because most of the creative is pick-up. Mailing the first-time, low-dollar customers with campaigns that are less expensive or mailing them during the strongest season offers the best potential to make a second purchase.

The first-time customers who bought in prior years with better than average dollars spent should receive extra consideration. What did they buy that was so expensive? And why did they purchase only once?

Look at the purchase history and segment merchandise categories. Perhaps the purchase was a big ticket item that doesn’t need replacing, or a wedding registry item, a gift (look at the ship-to address for clues) a gift certificate, or a brand that you no longer carry. Once you’ve identified several key commonalities, develop a promotion to initiate a second purchase.

Tip: A promotion has two elements: an offer and a message. Often a simple message is enough to motivate a customer to purchase. One cataloger monitors first-time buyers who spent twice the average. If the first-time customer remains inactive for 13 months, the mailer sends a letter asking, “Did we do something wrong…give us a chance to make it right” and includes a survey. The responses shape future mailings of the first-time buyer and frequently help craft a compelling message to earn the second sale.

First-time buyers have untapped potential. Identifying this special group and then marketing to them is the best way to recoup the acquisition costs.

Do the math to understand the marketing cost to acquire customers. Run the numbers to reveal the potential revenues of each campaign as well as the break-even. And give them the attention they deserve — these are future multibuyers.

Gina Valentino is the owner of Hemisphere Marketing, a catalog consultancy based in Kansas City, MO.

SPRING ’07 CATALOG: VARIABLE COSTS
TOTAL UNIT COST
Creative $27,000 $0.27
Print $25,000 $0.25
Postage $21,164 $0.21
Lists $6,000 $0.12
Data processing $4,000 $0.04
Order form $1,909 $0.02
Total quantity printed 100,000 $0.91
SPRING ’07 CATALOG: MARKETING COSTS
ACQUISITION
Mail quantity 50,000
Orders (customers) 500
Revenue $32,500
Average order $65
Cost $32,000
Cost to acquire $64