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Every year around Thanksgiving, my parents go Christmas tree shopping. When we lived in Ohio, we actually cut our own tree. But in Florida, where they live now, there’s no tromping through snow with an axe or tree saw, picking the best Douglas fir, etc. Now they go to a tree farm.

I don’t recall exactly how they picked the place they go to now, I think I was in college at the time. But my parents have been Christmas tree shopping at the same location for more than 30 years. Every year, the company sends them a postcard, reminding them of the location – or letting them know they’ve moved. It’s a small cost – with a big revenue.

Think about it. While my parents only spend maybe $75-100 a year at that location, they’ve spent that amount for decades. That means they’ve spent– so far – around $2500-3000. For a postcard. And that’s not counting the fact that my sister and her family buy their tree from the same location and have for 15 years. Yes, I know there’s also the cost of growing the trees, cutting them, trucking them from Wisconsin to Southwest Florida. I don’t know those specific costs, but Bob Heath does.

He also knows the best way to encourage repeat business is to lean into his branding and marketing. Each customer also takes home a free jar of pickles from the Heath family farm with their tree.

A Measure Beyond Words

Welcome to the next step in building a truly strategic marketing system for your small business. Over the last five weeks, we’ve looked at several questions you need to answer for your company to determine the best, most effective marketing approach. Next week, we’ll tackle the hardest question most entrepreneurs must face, not only early on, but throughout the life of their business.

We got the customers to us. We looked at where they come from and how they find us. We examined how often a transaction resulted from finding us, and tracking where each yes happens that leads to the ultimate goal – a sale. Except that’s not always the ultimate goal.

We pivoted on the question of what types of solutions your potential clients need – long term, short term, or some hybrid of the two. The next step was counting the cost to acquire the customer. The expense of the solution, in basic terms, plus the overhead involved in marketing – online, in person, signs, cards, buildings.

But today, we’re going to take a deeper look at the long-term numbers to consider. Individual cost is one thing. But even businesses that rely almost exclusively on short-term solutions must consider the value over the life of a client. Especially when the statistics tell us it costs approximately five to seven times more to get a new customer than to retain an existing one.

So let’s dive in.  

A Tale of Two Clients

For starters, let’s unpack that new to existing customer cost ratio.

Every year, as everything gets noisier and our time and money are stretched further and further, it becomes that much harder to get people’s attention. You may have heard about the proverbial 5,000 ads a day Americans are exposed to. I’m sorry to say, it’s likely a LOT worse. The farthest back I can find that number quoted is in 2006. It’s in an article that points out that we’ve escalated from 50-100 ads a day in the 70’s to 5,000 a day today. But again, that was almost 15 years ago.

Now, what am about to do is by no means the proper way to make these calculations. Just letting you know up front, I’m using the same inaccurate causal relationship that the article posits. Using that math – 100 in the70’s to 5000 in 2005/6 to today… means that the average American sees between 10,000 and 20,000 ads in a day. But I’m exaggerating to make a point. A little.

Regardless of the actual number of ads the average person sees in a day, the numbers do show that costs to acquire new customers are significantly higher than to retain an existing customer. Yet studies show that nearly half of all businesses spend a more significant portion of their budget to bring in new customers. At the same time, spending pennies trying to reduce churn – and are more often successful in the latter than the former.

That’s, of course, for the few that actually track it.

A Matter of Perspective

Let me throw a few more numbers your way

  • 60-70% – the probability of selling something to an existing customer
  • 5-20% – the likelihood of selling to a new customer (it drops to zero if you don’t get at least get some contact info before they click away)
  • Previous customers spend 5-10% more money on subsequent visits (real or online)
  • Just retaining 25% of past customers can increase revenues 30-125%  
  • In 2014, Neil Patel calculated that returning customers spend on average 67% more than first-time customers
  • In 2016, only 40% of businesses of any size tracked customer retention and loyalty in detail.

But what does that all mean for your small business?

Running the Numbers

Customer Lifetime Value is a projection, based on past sales and experiences, that estimates the average customer’s monetary worth to a business. It’s that simple and that difficult.

The fact is, most companies that think about doing the math are confused in their approach. Here at Grow the Dream, we take a more holistic approach to marketing strategy. One that takes into account as many factors as possible – and filters them through your ideal customer profiles to create a specific, measurable, active marketing strategy. One that can be effectively implemented.

The ideal customer profiles are what makes these strategies so effective. I haven’t gone into much detail on them in these articles so far, in large part because they are proprietary. But they are key to our approach for several reasons.

It’s Only a Model…

Think of a ideal customer profile as a model. It’s a picture of the perfect consumer for your product or service. And I’m talking about a detailed model. If the strokes are too broad, the model is ineffective. You want to be as specific as possible about the demo- and psycho-graphics of the customer.

If you have existing customer data, this is extremely helpful. But the initial strategic work can be done with estimates and reasonable assumptions as well. Usually our clients who come to us in the very early stages of their business startup work hands-on with us for a longer period of time. That way the initial assumptions can be tested and refined by actual results.

One of the hardest things for most entrepreneurs to realize is that their customers don’t see the business the way the business owner does. You’re selling dog obedience training – they’re just looking to get Fido to stop barking when they’re not home. Ideal customer profiles allow the business owner to shift perspective appropriately.

The word cohort refers to the smaller Roman military subsets. Six people were in a cohort. Ten cohorts formed a Legion. Our current military framework of officers’ ranks is based on that approach. In the marketing world, we redefine cohort as a segmented group of customers. The advantage of this approach is that it allows us to see how groups of people that are similar behave.

The ideal customer profiles take that data, allowing us to discover the best clients – the ones that your business serves best for the lowest outlay of resources.

Piece by Piece

The cohort approach is also valuable when defining the sales funnel. Remember, what we don’t measure, we cannot manage or improve. So we note, measure and track each stage as a typical customer goes through the sales funnel.

The idea is that at every stage of the buying process, you have a group of people – a cohort at that level. Because we’re tracking and measuring what’s happening to each of these groups of people, we can do several things.

We know what the customer is usually seeking at this point and we can offer a lead magnet or some similar small agreement to move them further down the funnel. The timing of each decision they’re making becomes clearer. We can figure out why there’s a logjam. We can even determine if an offer we’re making is too big or small for the level the potential client is at.

The ladder of yesses that guides potential customers down the sales funnel isn’t usually something that can be assigned a monetary value.  But it both reflects our larger model and gives us plenty of insight into the lifetime value of a customer. Even if the client is returning to buy again, they may need to be guided down the funnel again, although it’s usually a compressed time frame.

By knowing the steps and stops and needs of the clients at each stage, you can manage both expectations and their journey. And the more precisely you know each step and stage, the easier it is to automate some or most of the process, freeing up personnel resources for other tasks and projects.

Of course, we are going to refine that model as we get more data from our ideal customers.

Reaction Time is a Factor Here

Another way to look at the lifetime value of a customer is their total worth to the business over the whole period of their relationship. And that requires a relationship.

As much as automation can help, its real resource is handling the mundane, allowing the humans to focus on and serve each other. Even if your business is solely online, and you don’t ever physically meet or exchange tangible money, relationships are key.  

Poor handling of relationships is also the number one reason for customer attrition. Just because it’s easier and cheaper to retain an existing customer, doesn’t mean you should ignore them.

There are several approaches to help build and foster customer relationships, adding to their value to your business, and your business’ value to them.

Say “Thank You”

Gratitude goes a long way in business. Especially in today’s world. A simple thank you email after a purchase is an easy (and automatable) way to bolster an early relationship. You might also include a coupon code, or save it for a reconnecting email later.

It will cost a little more, but the added cache of an actual mailed thank you card or postcard may be worth it. With so few of these being sent today, it’s a very easy and real way to stand out.

Like & Share

There are two ways to do social media as a business. One is to post regularly, so that your brand and offers are always out there, easy to find. Even off-brand posts, or humorous memes, like the ones we post on Facebook and Instagram help build name awareness. Humor can also be part of humanizing your brand. The more on-brand you can do, the better, of course. And keep in mind social posts from business pages don’t travel as well as they used to.

The other aspect of business social media is using the platforms to communicate with your customers. Asking them to Like, Subscribe and Share is pretty standard these days. Most customers will at least “Like” your page and some posts. Subscribing is a bigger commitment. And sharing is the holy grail of social media. Posts shared by just one human account can catapult your material about ten to twenty times as far as your business post’s standard reach.

And the better quality and usefulness of the content, the more likely it is to be shared. Again, the ideal customer profiles are extremely helpful in selecting material to create or share. In a perfect world, a social media post will be useful to your clients, their friends and general social media users – and reinforce your brand, building business as well as relationship with a wider audience.

You can also use social media and Google ads to retarget existing and potential clients who have discovered you or shared your posts. Just try not to be too creepy about it.

Pledging Allegiance

Another fun tool that many businesses have implemented to drive repeat business is a loyalty program. Customers carry a card, or can access the program online, that rewards them for being faithful. Everyone from hotels and resorts to grocery stores and fast food restaurants now offer benefits for repeat customers.

And not just repeat customers – signing up for a loyalty rewards program can be a rung on the ladder of yesses to build a relationship even before the sale.

One thing to always keep in mind, though. The loyalty must run both ways. That means the incentives you offer cannot just be a way to encourage customers to put more money in your pocket. The offers and deals must legitimately be of benefit to the customer. Even better – try and tailor the offers to help clients self-select as ideal customers.

A Mouth is a Terrible Thing to Waste

Also take into account referrals … They are a non-monetary source of customer value, and often hard to calculate, but potentially invaluable. Numbers prove the age old anecdote – word of mouth is your most powerful marketing tool. And customers who fall inside your bullseye are more likely to have friends, colleagues and associates who are also in your ideal frame…or close to it.

Not taking advantage of referrals is leaving money on the table that is rightfully yours. Just be mindful of not being too aggressive or sales-y when encouraging existing customers to offer referrals or testimonials.

“Do what makes people feel good and they will continue to buy from you and to refer others to you who will also continue to buy from you.”

As you can imagine, the lifetime value of your ideal customer is going to chart higher than the outliers. Since lifetime customer value is such a crucial calculation for your business’ success, ideal client profiles can make or break your marketing strategy.

In some rare instances, your perfect bullseye client is going to look different from 10,000 feet than it does at ground level. That’s one reason for our focus on short term vs long term solutions. I don’t know what the answer is for you – it’s all dependent on what you are marketing. That’s why we do custom solutions for our clients.

If you’d like to learn more about how we construct our exclusive customized ideal customer profiles or want to jump in with building a strategic marketing program to help your business grow, please reach out. We love helping businesses build, and we can’t wait to get started on yours!

If you missed any of the other articles in this series, the links to them are included below.

7 Questions Your Small Business Should Ask to Focus & Track Key Performance Indicators in Your Marketing Strategy

Where Are Your Customers Coming From?

How Are Your Customers Finding You?

How Often Does Finding You Lead to a Transaction?

Are Your Customers Looking for Long Term Solutions or Quick Fixes?

What’s The Cost to Get a Customer?