Marketing Isn't What It Used To Be
“Marketing isn’t what it used to be” – Thank Goodness!
Looking back to when I started my marketing career in the early ‘80s, compared to how we work now, there is no doubt in my mind that we were winging it!
Pink eyed & lunched out, our reputations & progress up the slippery marketing ladder lived or died by how effectively we deployed our marketing budgets. This, long lunches excepted, is still true today but the key difference is what passes for“Effective”
Back then we were lauded if we could tick any of these boxes:
- Increase in market share (as measured by Nielsen)
- Brand saliency improvement (as measured by a cheap Usage & Attitude Omnibus survey)
- Help the Sales Team get some distribution by putting together a package of tacky tea towel offers or trade “incentives” for buyers/procurement teams
- Get a write up for our brand in Campaign or a other trade magazine
- Not fall out of the taxi after an agency lunch
- Win an advertising award
If you get to tick more than one box, you could name your budget for the following year & upgrade your company car from a GT to a GTI.
Incidentally, your marketing agency didn’t care a hoot about the first 3, they just wanted a shinny awards bauble to go in reception.
As John Wanamaker, department store magnate & marketing pioneer said, “ Half the money I spend on advertising is wasted; the trouble is I don’t know which half”
It may have been true then & still held partially true in 1980 but there is absolutely no excuse for that as we approach the 2020s!
Today we have access to so much data that the challenge is not to drown in it.
I always advise clients to begin by getting a firm grip on 2 key numbers. Somewhat perversely, I don’t start with the marketing spend or Return on Investment. If you begin by analysing your customers in terms of how much profit they deliver, you will get a good indication as to what you should or can afford to be investing in marketing.
This brings me to my first KPI:
Customer Lifetime Value (LTV)
Understanding the lifetime value of your customers is key. It informs many areas of your marketing, such as allocated budget and channels to focus on.
- Customer lifetime value (LTV) is the projected net profit that your customer will generate for your business during that customer's relationship with you.
- Let's say your customers spend anywhere between £26 and £59 when they buy with you, and the average transaction value (ATV) is £43.
Of course, not all customers are equal!
This image shows how uneven the distribution can be across different segments of customers, and it's something to bear in mind when attributing LTV to marketing channels:
Bear in mind also that not all customers consume the same level of cost to the organisation. The needy ones will be forever calling customer care; some may want you to carry a huge amount of stock, which eats up working capital etc, etc. I suggest keeping it simple to start & refine the model later.
Then you must calculate the average purchase cycle (APC). You can do this across any timeframe, but we'll choose a year. In this example, purchase frequency is 1-10 per year, & the average is 5 per year.
Finally, you must understand your customer lifespan (how long they remain a customer). In our example, it's three years.
Now we calculate LTV using the following formula: (ATV x APC) x Lifespan = LTV
For our example above, that's (£43 x 5) x 3 = £645.
You can optimize and increase LTV by focusing on only two areas: retention and up selling/cross selling.
Later you can also attribute the value of one customer referring another (Advocacy) but keep it simple to start with.
- Customer Acquisition Cost, (sometimes called Cost per Customer (CPC) or CPA -Cost per Acquisition)
Now you know what the average customer is worth, you can calculate how much you should spend to acquire them. Having this understanding is key to optimizing your bottom line.
Calculating customer acquisition cost (CAC) is simple. Divide your total acquisition costs by the number of new customers generated over a specific amount of time.
As a marketing director, your job is to ensure that CAC is at least lower than LTV.
When calculating CAC, keep various factors in mind:
- Costs associated with all marketing campaigns (creative, media, agency fees etc)
- Salary of Marketing and Sales employees
- Sales and marketing software that assist with growth
- Professional services or outside contractors hired
- Other related costs associated with marketing
Ideally you will then apply this model across all marketing channels in order to determine where you are getting the greatest Return On Investment (ROI)
No more excuses for not knowing which half of you marketing budget isn’t working!
The job of any Marketing Director & indeed the whole leadership team, is to aim to reduce your Customer Lifetime Value & reduce your Customer Acquisition Cost.