Promotional Budget Split

About a month ago, INC magazine ran an article about the split of promotion and marketing dollars among customer acquisition and retention. We thought they had it about right, saying that various factors determined how to allocate marketing dollars. While we don’t have a formal course in this aspect of marketing at www.theasoe.com, we do address the subject in our course E15 on marketing best practices. We also have some other thoughts on the subject, some of which INC addressed:

1. At what stage in growth is your company? If you’re early in your corporate life cycle, you should be spending more on customer acquisition, and less on retention, because you have fewer customers to retain.

2. What’s your customer acquisition cost? Do you even know? A simple way of computing it is to take all the money you spent on acquiring customers (including the amount you spent, or your sales force  spent, along with other marketing costs) divided into the number of new customers you got. You can make further refinements by the source of the new customers…..sales call, internet web site, print ads, etc.

3. What’s your customer churn rate? That is, how many did you lose last year? This figure, along with the ones that you added, gives you the churn rate. Your churn rate shouldn’t be more than 20%, in our opinion. If it is, then you need more work on customer retention, not just acquisition.

4. What are you doing to retain customers? It’s good if your retention rate is 95%; it’s hard to get it much above that figure, and doing so might even be cost prohibitive. If your retention rate is below 95%, you’ve got work to do. Do you or your sales force know why customers are leaving? It could be poor service, price increases, sales persons attitudes (read snobby, for example).

5. What’s your lifetime customer value? How long do customers stay around? If you have high customer retention, you can and should spend a lot to acquire a customer. You’d think this was common sense, but you’d be surprised.

6. What’s your gross profit (gross revenue less variable costs) per acquired customer? Or even retained customer. If it’s high, spend more! Even in a recession!

So, as we often say, we hope you find this post useful. That’s what we’re here for.

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