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How much do you spend to bring a customer in the door?
The ideal amount will be determined by the industry you are in. If you sell athletic shoes or beverages of any kind, you have to compete with Nike or Coca-Cola to find retail shelf space. If you are in the construction industry, you have estimating departments for hard bids and sales to handle design-build.
If you sell widgets to a larger manufacturer you might respond to a request for proposal or seek out new customers. If you sell online you have to make it easy for customers to find you which means pay-per-click advertising, social networking, or search engine optimization.
Inherent in any example you can think of is that there are two main costs to consider.
The initial cost is what it costs to bring that customer in the door the first time. The later cost is what you spend to keep that customer coming back.
Initial costs include finding and the call to action. Finding could be buying a list of names that matches your ideal customer demographics. It could be attending networking events to meet new customers. It could be using industry data to determine what companies are the strongest potential customer. It could be obtaining quality retail shelf space or it could be free samples.
The call to action is where you want your customer to do something. If you send direct mail, you want the person to visit your webpage to give more information or buy something from your catalog. If you have a webpage, you want to get the person on your email list. If you meet an architect or designer, you get them to invite you to their bidders list.
Whatever your method to find potential customers, you need to measure the conversion rate. Conversion rate is a critical element of your business plan dashboard. If you can’t measure your conversion rate, you are probably throwing marketing money away.
Once the customer is in the door you incur the second cost. This normally costs less than the initial cost. But it brings the opportunity to make more money off of each customer.
Think about it. If a customer comes back once a year, or a month, or each week(!), all you have to do is keep them happy each time they visit and you make more money. Realistically, you will never retain 100% of customers. There is no way to spend $100 on marketing today and get $100 of marketing value year after year. But increasing retention can give you value many years after the initial $100.
When you know the cost of finding, conversion, and retention, then you can calculate your lifetime customer value. When you know on average that customers will spend $X over their lifetime as your customer, you can lose a little money on the first transaction in order to get them in the door.