Almost every cataloger loses money acquiring customers, and makes money mailing to customers. So it’s critical to know how much you can afford to lose or are willing to lose to acquire a new customer and still generate a profit on the name over a given period of time.
One of the keys to systematic, safe- and long-term profitable growth comes from expanding prospecting programs that generates new names at or below your acceptable cost-per-name and pulling back on those programs the generate names at a cost above this target threshold.
At Catalog Solutions, we use the following steps and rules of thumb as guide to deciding how much to spend to acquire a customer.
- We first need to know what our contribution margin is, so we can calculate our profit or loss per new name for each marketing effort. The data comes from your profit and loss statement.
The formula for contribution is:
Sales x ((cost of goods % of sales + variable operating expense % of sales) – marketing expenses)
- When analyzing prospecting efforts, the first number to study is the cost per new name added. To arrive at this number, divide the contribution number (usually negative when prospecting) by the number of new names you added to your list as a result of the effort (i.e., rental list, space ad, key word buy on search engines, etc.).
- It’s a pretty safe rule of thumb to spend up to the one-year value of a customer to generate a new buyer. In other words, if a new buyer generates $15 in profit contribution within their first year, you are generally safe spending $15 or less to acquire each new customer.
In almost every lifetime value analysis (LTV) we have done for food mailers, approximately half (46%) of the buyers’ total profit accrues in the first year.
- Assuming you limit prospecting losses to the one-year customer value, you would eliminate all lists, ads, and other customer acquisition programs that have a cost-per new name that is above this level.
- Maintain your current usage of lists and media that produce a cost-per-new name at or around your one-year customer value.
- Expand your use of lists and media that produce new buyers at a cost significantly below your one-year customer value. For example, if you run three ads a year in a publication with a low cost per new name, run bigger adds, or run more frequently. Test similar publications.
By rigorously and consistently applying the list and key code analysis to your entire marketing program each year, you will begin to see your business in a new light, have a better understanding of where to allocate scarce marketing resources and make better marketing decisions. You will see how different prospecting programs impact current earnings and cash flow.
And you will have the data in place to help you determine who to mail to, when to mail, and how many pieces to mail each year. The mailing list and key code analysis becomes the starting point for all future mail plans.
Tony Cox is founder of Richardson, TX-based catalog consultancy Catalog Solutions.