When I take a look at a company’s budget, I generally find that most people spend too little on advertising and have an unrealistically high expectation of return. This sets the client and the agency up for failure. A true agency should be able to allocate the appropriate amount of dollars to obtain the desired return, and the CLV is a huge helping hand in determining that allocation.
Determine expected worth over time:
The first thing to do is to attempt to work out what a customer is worth, over the period of time that they remain loyal to you. This concept is called Customer Lifetime Value (CLV). The simplest method is to take: (sales turnover / number of customers) X the number of years the average customer stays. CLV varies enormously from industry to industry. For example, consider a firm that operates a clinic for emergency medical care. This company is unlikely to have great customer loyalty because they provide an emergency service. Patients may visit them only once over a 5-year span. If the average visit costs $750, the clinic’s CLV is probably only $750. On the other hand, consider a firm of accountants. A higher CLV will be present, due to the fact that consumers do not change accountants often, if ever, and spend a great deal of money with them. Suppose if the average client spends $1,500 annually, and that client stays for 10 years. That would result in a CLV of $15,000.
What are you prepared to spend to get a customer?
You can look at it in terms of a percentage cost. Imagine you are an accountant, would you be prepared to spend say $750 (5%), $1,500 (10%) or $3,000 (20%) to get a customer worth $15,000? Next, ask yourself how many new customers you would like to gain this advertising year. If you are an accountant and you want 10 new customers and you are prepared to spend 7% of their CLV getting them, then your advertising budget is $10,500 for that year.
Be realistic. If you are budgeting less than 5%, you could very well have an unrealistic vision of what it takes to gain a customer. If you are budgeting more than 20%, it will be crucial to find ways to build a better value for your product to the consumer. An Emergency Care Clinic might be looking for 200 new customers, but is only able to spend 5%, or $37.50, on each so their budget might be $7,500.
Once you have done these calculations, you have a fair objective against which you can measure the effectiveness of your advertising.
Advertising is an Investment:
The case of the accountants is also an interesting one because they may only start to make a profit on their new customers in year two or three. How do you allow for this? The thing is to write down your advertising budget as an investment, in the same way, that you would write down business machinery. A great example of this is when Google bought out YouTube. Google has been using this type of accounting technique to increase their advertising budget, and get new customers at a faster rate than Yahoo and Bing. They also have a team of employees that are building applications that are free to the end-user but cost Google millions. Google understands the value of a customer – and it’s made them unbelievably successful.
It seems simple, pump more money into marketing, and an equal return will flow back in, unfortunately, it’s not that black and white. Efforts take time, and in a society of convenience, we are used to instant gratification, but in marketing, have patience and you will see the results you need.
Closing Thoughts
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