Waste 6: Failure to Understand the Lifetime Value of a Customer!

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Waste #6: Failure to Understand the Lifetime Value of a Customer.

A big area of waste in a company is when marketing decisions are made on the one-time purchase of a customer, not the life-time value of a customer.

For example, a retail clothing company might do a direct mail piece or have a catalog as a way to attract new customers. Let us say the mail piece generates 10 new customers that bought an average of $100 in retail clothing. That is $1000 in sales. In this case, the cost of the mailing, postage, printing, etc cost $1,500. The company concludes that the mailing did not work.

That is a waste. A big mistake. What is being wasted is the future opportunity for more customers! Why? Let us say this retail clothing company has a great product, good customer service and on average those 10 customers come back twice a year and spend $100 each time and keep coming back for an average of 10 years!

That is 20 return visits at $100 a piece or $2000. This times 10 customers is a total value of $20,000 generated all from a $1,500 mailing! The lifetime value of these 10 customers is $20,000. Also, not to mention the referrals or family members they might motivate to come and start buying.

The waste is $20,000 in new sales opportunity because the company stops doing the mailing! They concluded that they lost money on the mailing because they calculated only from the first, one time purchase, and not the lifetime value.

The industry that understands this concept very well is the music and DVD clubs. For $1.00 you can get 5 free DVD's. We all know it costs the company more than $1.00 to ship 5 free DVD's. What we do not understand but the company does, is the lifetime value of a new customer. They have calculated that over time, or a lifetime of the average customer, there will be additional orders on average that more than make up for a slight loss in the original mailing.

This is how a marketing budget should be determined. As long as the cash flow can handle it, more and more testing should be done and evaluations made on the lifetime value concept. Even if a company needed to borrow money to do marketing, they may find out that marketing brings a better return than any other investment the company could make. This is often the case.

This lifetime value is the same information used by manufacturers in determining to purchase a piece of equipment. Up front, they may not cover costs but over the lifetime of the equipment, the return justifies the investment. Such should be the same thinking about marketing.

For a free copy of the "10 Biggest Marketing Wastes" report and to learn more how you can find new cash and new sales by eliminating these areas of waste in your marketing, please visit http://www.21st-centurymarketing.com/
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