Buying Customers Isn't as Easy as You Think
Sugars wants to get marketers talking accounting.
Bradley Sugars has a knack for getting to nitty gritty of customer value.
The business coaching educator and founder of ActionCoach came to the United States from Australia in 1999, and has helped build businesses ranging from pet food to ladies fashions. His newly released book, Buying Customers, provides insight into understanding the real cost of customer acquisition and determining actual lifetime customer value. I recently spoke with him about how marketers can calculate marketing ROI, as well as customers' current and potential value.
Direct Marketing News: Buying Customers has some simple formulas for assessing marketing ROI and customer value. Don't you think professional marketers at enterprise companies already have this covered with all their marketing analytics?
Sugars: Marketing budgets are pegged to a certain amount of sales per quarter, but that has to change to what is the cost of acquiring customers per quarter. The biggest asset a company has is its database, and the person managing that database has to be given the proper budget to manage it. Unfortunately, CMOs are the first to get hit with budget cuts, so it's very important that they have a mathematical approach to justify what they do to the CEO.
Aren't the techniques you're proposing similar to lead generation and conversion activities most companies have been doing for years?
Most companies aren'tt doing anywhere near enough with either methodology. Most companies don't do nearly enough about acquiring quality referrals. The formula is divide to multiply. When I had a dog food business, for instance, I knew that I had to buy a referral for $12, so we could give away anything that cost $12 or less to get a good referral. But the other thing we knew was that you got better referrals from your best customers, so make the investment with them first. You'd be surprised how many companies don't focus efforts on getting referrals from A-grade customers. So now you need to identify who are, say, the top 100 strategic partners you'd like to be in business with and determine what you'd give to get them.
What's the best way to put a value on a customer?
It doesn't have to be all that complicated. We get too wrapped up in Big Data and the cloud. It could be as simple as get out your database, start with the letter M and see who produced the most business for you. I had a chiropractor who was very good and I referred a lot of people to him. I got to talking to him about it once and he checked into his records. I had referred 38 patients to him, but he got a total of 230 referrals from my referrals. How do we make every single customer more profitable? When it comes to lifetime value, you've got to know what the referral rate is.
Of course, this takes time. The challenge for marketing departments is justifying expense for talent to follow up on the opportunity. Maybe it's because I'm an accountant by training. Most marketers can't speak accounting, so I thought that a book like this could teach them a way to communicate with other members of the company with simple concepts like, we buy a customer for $50 that returns $100 in profit. If you can communicate with this methodology, your budget will be increased.
You mention using the nine basic needs of the customer to build lifetime value, and it occurs to me that some of these go right to the heart of using social media to engage customers--things like understanding, participation, identity.
Social media sped up the marketing cycle. We used to have to test for months, now it's days; but people's needs for human interaction have not changed. That's why retail will never entirely disappear. People want to feel that the purchase they're making makes them a better person. I'm one of the biggest online shoppers there is, but I find that a lot of [e-commerce companies] leave human needs unmet. Zappos is one that stands apart. I buy a lot of stuff from them, so they give me a special website to access and a special person to call if I have a problem. When I do consulting for a big company, I always ask them, “How easy do you make it for me to be an advocate for your company?
You think it's effective for companies to have a story to tell. What's the best way to construct one?
It's not that easy. If you're going to promote a story, make sure it's a true story. Making up a story does not equate to actually having a story. Southwest Airlines has a great, true story, and United and Delta felt they needed a good story to compete, so United came up with Ted and Delta did Song. They tried to beat up on Southwest by saying we have a story, too. But United? A cheap and fun airline? C'mon, it's not in their core. United makes decisions based on what the unions want them to do, not the customers.
We've had a little fun beating up on Big Data, but if you were a CMO of an enterprise company and the CEO handed you the keys to the data warehouse and told you to go to town, what would you do with it?
The first thing would be to focus on the referral base. What referral business are we getting and where is it coming from? Second thing I'd look at is how we segment our current database for repeat business. Say it's a big insurance company. Let's look at what new genre we could move into that would appeal to our present customer base. Strategizing for repeat business—that's a massive opportunity for Big Data. Sometimes marketers have to become product developers. Third, I'd use the power to bring better data to the sales force. In most companies it's not broken down into enough detail to see where sales are really coming from. Sometimes marketing stops too early. We forget we're part of that process.