We’ve talked previously about knowing the value of a customer. And if you haven’t had a chance to evaluate each of your customers to determine their lifetime value, you’re going to want to run those numbers before you determine how much you can/should spend on getting new customers. In the end, if you spend too much acquiring that customer, their lifetime value isn’t going to mean much.
It can be difficult to really understand the value of buying customers. This is because often you’re only seeing the money go out and you’re not relating it back to the sale that you will eventually get. This isn’t about just continually tossing money at marketing initiatives. It’s about some strategic planning, and analysis of how those strategies are working.
There are a number of marketing initiatives that you can take on, and what you want to think about is how much did that marketing cost – in terms or your own personal time, the cost of the service (whether it be an newspaper ad or a physical table at an event), and the cost of your supplies if you made physical product for this event. Then taking that cost and dividing it by how many customers you got. (We’ll touch on this a little later down, but you need to know where your customers came from.)
To break all this out into tangible numbers, let’s look at a few examples.
Active Word of Mouth
We dedicated a whole blog post to the idea of physically going out and introducing yourself and your t-shirt printing business or embroidery business to prospective clients. This is marketing. But how much did it cost you each week or each month? Gas, your labor costs, hard goods, and sample products are all part of your costs. Your numbers are going to vary, but let’s make some estimates below:
Gas = $50
Labor = $20/hour x 8 hours = $160
Hard Goods = $15
Samples = $75
Total = $300
Now the above are reasonably conservative numbers. It assumes you’re only spending 2 hours a week going out to businesses. Depending on the jobs you already have to complete, and any other work you’re doing to grow your embroidery business or your t-shirt printing business you may find you’re spending 4+ hours every week. So when you go out to businesses, make sure you’re tracking your time, your gas usage, and any samples, brochures, or business cards so you can accurately evaluate.
Let’s say each time you went out you visited 20 businesses. At the end of the month you have 80 names. Now not every one you talked to is going to be a potential customer, so let’s say 40 of those people are leads. Taking the $300 you spent in total, each lead cost $7.50. Out of those 40 leads, let’s say you where able to get 4 customers, and each customer makes an average $250 purchase. If you subtract your marketing cost of $300 from the total sales, you made $700.
Once you subtract all your other costs for fulfilling the order (blanks and supplies), you will likely find that you still come out ahead.
The two numbers you want to be paying attention to are the cost of a lead and the cost of a customer. We’ve already said in our example that the leads cost you$7.50. Your customers however, cost a little bit more: $300/4 = $75. Now that they’re a customer you’re going to be able to evaluate their lifetime value. So while their initial order was $250, and it cost you $75 to get them as a customer, that’s $75 you don’t have to spend again. And if you’ve done the math on their lifetime value, that customer may be worth $1,500 or more over a three year period.
One of the best things to get out of all this as well, is that over time, the more you do this, the better you’re going to be at it. You’ll get better at talking to people, so perhaps you meet more prospects. You’ll get better at closing deals and turning prospects in customers. And your costs are going to remain about the same, so in the end each lead and customer will begin to cost less.
What are some other ways to reach potential customers?
We recognize that going out and talking to people isn’t the only way to generate interest in your t-shirt printing or embroidery business and create potential customers. So let’s say you budget $300 a month on advertising and marketing. What other options do you have?
Physical advertising like newspapers, magazines, newsletter can be a little bit harder to track the return on them, but they also have the potential to reach more people. Perhaps you spend $300 to run an ad in your local newspaper two Sundays of every month. How many people have a newspaper subscription? Probably a few hundred, depending on your city size.
While the lead cost is is pretty high on this type of marketing – perhaps 5 potential customers come to you because of an ad you ran, that’s $60/lead. However, because the customer picked up the phone and called you, or walked in to your store, they are going to be more likely to purchase – they are looking for embroidered t-shirts. If three of those customers make a purchase, and we use the average sale of $250 as we did above, you’ve made $750 in sales, and spent $300 on marketing/ So those three customers cost $100 in marketing.
What if, after you factor the marketing cost to gain that customer, and the cost to make the order for them, that your profit is zero (or close to zero)? Don’t give up! Talk to your local newspaper about your other advertising options, perhaps they have a lower cost option for you to explore. You may want to take a look at your Facebook page or website to see if there’s something simple you can do to make it appeal to potential customers.
Events and trade shows can be another big opportunity to generate leads. Perhaps it’s a one day trade show, and your table costs $400 and you spend $300 getting ready for it and creating product to sell at the event, and other examples of embroidery or heat transfer t-shirts. Unlike having to go store-to-store to find prospects you’re getting a more concentrated group of people, so you might meet 200 people in one day. If you get 100 names, each lead only cost $7. If 20 of those leads purchase product, your cost per customer is $35. If the average transaction is $45, you made $900 in sales, and chances are you’ll break about even on the event.
Was it worth it? Potentially, because while you only made 20 sales that day, you’ve still gone 80 other names to follow-up with. And those 20 customers who did buy from you, are still great prospects for larger orders.
One other thing to keep in mind, is that throughout all this you should have been factoring in your paycheck as part of the marketing costs. You should be paying yourself $20 an hour to stand at the event and make t-shirts, or go out and talk to businesses. So you still got paid. While the business may have only made a smaller profit, you’re still ahead.
To wrap everything up take a look at the numbers over time to see how much marketing you’re doing per customer – what is that cost per customer. Think about ways to optimize that – run different ads, offer different promotions. Over time you’ll find you get better and better at knowing what works and can reduce the cost per customer. Don’t be discouraged if you do the math and your profit is a few dollars. If you do a good job with your customer experience, you’ll only have to pay to acquire that customer once, and their lifetime value will be worth the initial investment.