When the American dream goes awry.
Not so long ago there was a company. They attempted to disrupt the mattress industry. They were believed to be the next unicorn.
Unicorn as in a privately held start-up company valued at over $1 billion, the start-up entrepreneurs ultimate dream, not the fairy animal.
Anyway, the business model was simple. They didn’t have old fashioned stores or retail partners; you got a mattress delivered to you in a box. You could try it for 90 days, send it back, no questions asked. Thinking they had an annuity revenue stream they ended up spending more to acquire a customer than the customer was paying for the mattress they bought.
Growing the business became a real money pit. For every dollar they invested in marketing, they got less money back.
The more money they spent on marketing, the less money they made.
So, why am I telling you this?
I’ve been on two calls with a client and a potential customer this week both of whom asked me one of the number one questions I hear.
“How much money should we spend on our marketing?”
My standard answer to this usually isn’t well perceived at first glance.
“Well, that depends.”
I am aware this is not a satisfactory answer, but I stand by it – for now.
Let’s look at what these two people were really asking.
They needed me to name a justifiable cost associated with executing their growth strategy. So, both of them have a clearly defined problem that they are solving. Both of them have the basics, a clearly defined solution, which offers excellent value to the customer. And they both narrowed down and targeted their ideal customer.
So, to help them work out how much they should be spending on marketing, my question is and has always been “What is the customer lifetime value?”
Your customer lifetime value is one of the most critical metrics to understand within marketing.
It is the profit that you make after a cost of sales, cost of acquisition and cost to serve, over the entire lifetime of the customer. Once you understand this, you can make informed decisions on your marketing budget.
The goal? Bring in customers for less than their lifetime value.
You got yourself some profit.
Or, if you get it wrong and you spend more on acquiring a customer than you make over the total lifetime, you go out of business.
Now, as simple as that sounds, some brilliant people got this very wrong.
Let’s revisit our American mattress friends. They thought that they had recurring income. But really, you purchase a mattress, and you don’t need a new one for a while.
Sounds simple, right.
Well, they didn’t work it out that way.
They had an IPO planned; it fell over because they didn’t understand that they should spend less on marketing than the customer lifetime value.
So, my advice: Spend less in acquiring a customer than their lifetime value.
The moral of the story?
Don’t be the mattress company!