It’s important to know whether to take a loss on an initial sale in exchange for big downstream revenue when acquiring a new customer. If you’re lacking extensive data and analytics, this approach using two key customer-centric metrics may work for you.

Customer-Centric Marketing Needs Customer-Centric Metrics

To have an impact on acquisition, retention, and growth, marketers are articulating, developing, and implementing customer-centric marketing strategies that have an impact on the customer buying journey and experience. To ensure the customer-centric vision takes root, you need to establish clear metrics that are linked to the company’s strategic, operational, and financial goals. Those metrics will help with determining priorities and shifting the orientation of the company toward a more customer-centered business model.

Most of us would agree that it makes sense to invest in customers who are most likely to keep buying our products and services. There are instances when it is important to acquire new customers, potentially even at an initial loss on the first sale, if there’s a big downstream revenue opportunity later on.  How can you decide if it makes sense to take that initial loss?

First, you need to understand what it costs for you to acquire a customer. Customer acquisition cost is the cost associated with convincing a customer to buy your product or service, including research, marketing, and advertising costs. It’s an important business and Marketing metric that can be used to gauge Marketing’s performance.

Then use this information along with your anticipated value for that customer. Customer acquisition combined with customer value help an organization decide how much of your resources can be profitably allocated against a particular customer or set of customers. This approach helps you create customer-centric measures to determine whether further investment is warranted.

Two Customer Centric Metrics to Evaluate Whether It’s a Good Deal

Customer acquisition combined with customer value can help an organization decide how much of your resources can be profitably allocated against a particular customer or set of customers.

1. Customer acquisition costs (the cost associated with convincing a customer to buy your product or service, including research, marketing, and advertising costs)
2. Customer value can be determined with three variables.

Follow this relatively easy and affordable three step process for using these two customer-centric metrics to determine which customers and/or customer segments to invest in:

1. Create a Customer Value Score – You will need to develop a scoring process and create a score for each prospective customer.  You can create a proxy using two criteria: purchase frequency and customer revenue.  To use these you will need to establish a threshold: customer above the threshold will be high value and those below the threshold will be low value. Review the purchase frequency and revenue for customers you’ve recently acquired.  Then make a list of your prospective customer in your opportunity pipeline. Create a column one for customer value.  Evaluate each customer based on well much it mirrors an existing customer (a look alike model approach). “Score” this customer using the look alike as either high value or low value.

2. Calculate Cost to Acquire – Next based on your typical time from contact to close, pull a list of customers you’ve acquired in your most recent period. Calculate the hard and soft costs for each customer. Identify the most common (mode) cost as your acquisition cost.  The cost to acquire above the mode will be high costs, and costs below the mode will be low costs. You can add the concept of a factor to address the changes in investment level across the buying process if you wish.  Now, add another column to the table you created in step one for Cost to Acquire. For each of the prospective customers in step one determine two things: how close they are to close and your current costs to date.  Calculate your cost to acquire each of these customers. Those above the mode will be high cost and those below the mode low cost.

3. Map Your Customers – Create a 2X2 grid with one axis labeled customer value and one access labeled cost to acquire. You should have 4 quadrants: High Value/High Cost; High Value/Low Cost, Low Value/High Cost, Low Value/Low Cost. Plot each customer into the appropriate quadrant.

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Now what? Identify the prospects in the High Value/Low Cost quadrant.  These are the prospects where you should spend the money and be willing to give a little to gain more down the road. Obviously very little if any resources should be allocated those customers and similar prospects in the Low/Low quadrant. You may have to have some internal conversations about the other two quadrants. Calculating customer lifetime value for customers and prospects in these quadrants provides an additional filter that can guide your decisions related to customers in these two groups.

Ready to talk more about metrics, let’s chat.

FAQ:

1. Customer Acquisition Cost (CAC): The total cost associated with acquiring a customer, including marketing, advertising, and sales expenses.
2. Customer Value: A score based on purchase frequency and revenue, indicating the potential long-term value of a customer.

• High Value/Low Cost: Prioritize investment here.
• Low Value/Low Cost: Minimal investment.
• High Value/High Cost and Low Value/High Cost: Require internal discussion and further analysis, possibly using Customer Lifetime Value as an additional filter.

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