We talk to tens of thousands of customers every week at Homestead, and one consistent theme can be heard above all others from all types of businesses in these conversations. HELP ME MARKET MY BUSINESS! Now, some of these cries for help are from nascent companies yet to earn their first dollar. But many are from established businesses already doing hundreds of thousands if not millions of dollars of revenue, looking to grow. So, I thought I'd start a series of posts on "online marketing 101" which will at least give you my perspective on some global "truths" about trying to build or extend your business online.
I always start any conversation with a small business looking to market online by asking some very basic questions about their business.
- What need are your fulfilling? Every business exists to fulfill some specific need. This is also referred to as your "value proposition." What exact need are you trying to solve for? A quick, healthy meal at a reasonable price? Home pick-up dry cleaning? Camera supplies for pro-am photographers at the best price around? Remember that this is different than competitive advantage. That comes later. Before worrying about finding a niche that you think you can compete in, figure out exactly WHAT YOU DO.
- Whose need are you fulfilling? (i.e. who's your customer?) I mean, specifically, describe the set of customers who have the need that you are fulfilling in number one. Demographic (e.g. single working mothers), location (e.g. within a 2-mile radius of Wesley hospital in Wichita, Kansas), skill set (e.g. professional woodworkers), income level (e.g. have several thousand dollars of disposable monthly income), specific habits (e.g. commute over 1 hour per day). If you can't describe this set of people specifically, you have a problem.
- What's your cost of customer acquisition (CPA)? How much do you currently spend to acquire a new customer? How much higher could you afford to go? I'm always amazed at how few businesses do the math to figure out what they are currently spending to acquire new customers. The simple math here is to to take all the dollars you spend in marketing per month (exclude marketing that you do to generate repeat business), and divide it by all the NEW customers you acquire each month. A law firm might spend $500 per month on yellow page advertising, $15000 on advertising in journals, and $1750 on sponsoring the local public radio station. If they acquire 17 new clients in a month, that would be $17,250 / 17 = $1014 CPA (Cost Per Acquisition). If a hair salon spends $13,200 on their monthly advertising, and gets 210 new customers in a month, then their CPA would be $13,200 / 210 = $62.85. Different business models have dramatically different acquisition costs, but you need to know what yours is.
- What's the lifetime value of your customer (LTV)? Once you understand how much you are currently spending to acquire a customer, it begs the question of how much you should be spending. To figure that out, you need to know how much your customers are worth to you. This is called the lifetime value of your customer. In the above examples for a law firm and a hair salon, you can image that these numbers are quite different. An average law client might spend $15,000 with you on average in their first case. Depending on what kind of law you are practicing, these clients may become habitual customers (like in estate law, or dare I say divorce law?), in which case you would also try to estimate what percentage of the clients came back to you and how much they spent on their subsequent visits. Not that I'm advocating this as a good thing, but let's say that a client who gets divorced may be likely to come back to you 50% of the time for pre-nuptial legal advice and 25% of the time for a subsequent divorce. That would increase your lifetime value by $11,250, to $26,250. Now, spending $1014 on CPA sounds a lot cheaper, doesn't it? In the hair salon example, it's ALL about repeat customers. So there let's say your average first time bill is $35 and 25% of the time they buy products from you, at an average of $20. On top of that, 25% of the time the customer becomes a regular customer, coming back an average of 6 times per year, but every year half of your regular customers switch. Starting to sound like one of those SAT word problems? Maybe, but it could be the key to solving your business growth problems. In the above example, the salon's first time value (FTV) is $35 + $5 = $40, plus another $60 in the first year from repeat business (a quarter of your customers pay you $240 ($40 * 6), which is an average of $60). The next year half of them pay you again, which is another $30, the next year it's $15, etc. We'll call it about $100 of additional "repeat business" revenue over the lifetime of all your customers, which brings the LTV to $140.
- Are you maximizing the lifetime profit of your customers? Let's return to the salon example, which we said had a $62.85 CPA and a $140 LTV. Once you subtract out your costs of paying your hairdressers, paying for the products, running your shop, etc., chances are you don't have much left for profit. You have a classic CPA/LTV imbalance. There are only three ways to fix the profitability (and therefore viability) of this business:
- Decrease the cost of your goods/services (this is called your COGS or "cost of goods served").
- Decrease your cost of marketing (CPA).
- Increase the lifetime value (LTV) of your customer.
Most businesses focus on cutting their COGS or CPA, but both of those are very hard to do unless you are increasing the volume of your business at the same time. Spending time on these issues until you have a lot of growth usually results in a dying business. People say that they "just can't afford to stay in business" or "costs are just too high." But somehow the hair-cutter down the street is snip-snipping away and raking it in. Dollars to donuts it's because they've got a better LTV than you. Instead of trying to cut your CPA or COGS, instead focus on ways to increase your LTV. Usually the secret to this is in increasing the quality of your customer experience, and the way you encourage repeat business. In the salon example, if you could increase your "repeat" percentage from 25% to 50%, your LTV would increase from $140 to $250! One final point, is to make sure that the products and services you are selling to your repeat customers are you highest-margin (or lowest COGS) products or services. In the example of the salon, it could be that you make more profit on selling hair care products (let's say $20 of profit per visit) versus the actual haircutting (after paying your stylist, maybe you only make $10). We'll get more into maximizing profit and managing your costs in a later post.
These are the five basic questions I ask before starting to advise businesses on growth strategies. If you want to "play along" then spend some time answering these questions before I post Web Marketing 102: Online Lead Generation. Understand your business's CPA, LTV and COGS, and you're half way to building a thriving business (BTW, you're also half way to your MBA if you can spout these acronyms!).
Sorry for the long post, but I'm trying to make up for my silence over the past month!
--jsk
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