New Customer Acquisition Cost Reduction – Identify and Clone the Affluent Over 50s
The New Customer Acquisition Cost Argument
Being good at marketing cannot make up for bad economics. If your new customer acquisition cost is greater than they will spend as your customer, then that is bad economics. Your business will fail.Your new customer acqusiition cost is too high. So how should you reduce it?
Most observers will tell you that your new customer acquisition cost outweighs the cost of retaining an existing customer. By some way too, four to ten times as much. So the smart marketer will direct resources at keeping more of the customers it has rather than maintain high levels of new customer acquisition cost spend.
It’s argued that these outweighing factors depend on assumptions like existing customers increasing spend with you, purchasing at full margin and creating operational efficiencies for the firm. Does this ring true for your business? Is it really that much easier to buy your products and services as an existing consumer/customer rather than as a new one?
That said, new customer acquisition is needed by all of us to grow our business. So if you are in a growth phase, you’ll be spending more on acquisition anyhow. Conversely, if you have products in decline, you’ll be most exercised to keep the customers who consume them for longer.
What is obvious is this is not simple. Firms have to spend on both retention and acquisition. Being closer to your customer profitability numbers will help you decide how much to spend on finding and keeping strategies.
So, what steps should you take that helps you identify and clone your best existing affluent over 50s customers?
The 80:20 Rule
Are they in your top 20% of customers?
A lot of people assume their customers are roughly equal in value. They aren’t. The guru of the 80:20 rule, Perry Marshall, instructs that 20% of your customers will spend approximately four times the average spend. If you had a choice of finding more customers like the best 20%, as opposed to just any customer with a pulse, you’d want the 20%, right?
The way to do this is to calculate who spends most with you. There is a good chance you already have this information in your finance or customer systems, now is the time to dig it out. From top spender to least spender, rank them. Arguably, you should fire the lowest 10% as they’ll probably be costing you more to serve than they generate. Bad economics again.
There is a more sophisticated method to dissect your customers. It is called Recency, Frequency and Monetary Value. RFM for short. With this method you identify and weight your customers by their recency (as this is deemed the most likely indicator of buying again), frequency (adding up the number of orders placed over a time period) and finally by spend or monetary value. Weight the data and calculate a weighted score by RFM and bingo you have a fairly sophisticated view of your customer database. And more importantly, you have identified the top 20%.
So now you have a list of your top 20% by names and addresses.
Is your business providing services to the affluent over 50s? If you are providing, investment services, premium insurance, charities, will writing, health care, interior design, luxury products, furniture, fine dining restaurants, experiential events, heating systems, luxury holidays and many more; then this analysis will be hugely relevant to you.
By matching your top 20% to a list comprised of affluent people, you will be able to discover how important these over 50s individuals are to you.
By matching your data to the UK High Net Worth Database, the first thing you would get is a percentage of match. This is going to be a terrific predictor for your business. There are lots of reasons why the data might not match perfectly, such as both files having the same person, but at the wrong address, at least on one file. The data you have may be for a partner of someone who is on the database, but with an alternative surname. Your data could also have a high percentage of young affluent individuals which would not match well to the UK High Net Worth Database.
By matching at surname level, which means there would be a match to your client Mr Hanson at his address to a Hanson at the same address, a percentage match for your top 20% customers would be possible.
If that percentage was 50% or more, like a certain high end car marque we profiled in the north of England, then the UK High Net Worth Database would be a very good bet to find ‘lookalike’ prospects.
How do we know we can find lookalikes? The answer is that when we matched Mr Hanson, in our data we noted he has made investments in AIM companies, lives in a property valued at £750,000, and has a range of other demographic attributes that is his profile. The lookalikes come from sophisticated matching of other people with similar attributes.
This would create a custom audience of people that mirrored your best customers.
The clever thing about this is these people already exist. Trying to find and attract them using other ways is a very costly exercise. Other ways like newspaper advertising. Yes, the over 50s are higher than average consumers of newspapers, but readership is declining. The over 50s use social media, but there is a very high likelihood that few of your top 20% will be readily contactable through social media.
Here this profiling is free. The cost kicks in when you use the data in mailing campaigns. Unlike other media, like email marketing – where they may be a 10-20% chance of obtaining a permissioned email, or telemarketing, where there is a better than 75% chance they are on the Telephone Preference Service, the ideal lead generation method is direct mail.
And you can start your ideal new customer acquisition campaign, at modest cost, with a very strong chance of success. The affluent over 50s read more, they trust mail more, they get more emotional about mail offers. Mail is more memorable.
It might seem obvious – to anyone over 50 – but the over 50s read more too. This makes direct mail at least in the initial stages of contact a good acquisition choice. And it is one where its absolute value to your organisation can be measured accurately too.
One insurance business I was speaking to recently wanted to attract high net worth individuals for their premium insurance. Premiums were typically £2 to £5,000 per annum. Their focus had been all about assuming if you have a high income and lived in a well-off area, you were good for such a premium. Well, to a certain extent they were right. But wealth is different from income and property. It certainly combines them, but adds other aspects like investment values, unknown by the majority of data vendors. So one great way to reduce acquisition costs is to target based on wealth. Even better where the person who has that wealth looks just like your best customers.
In the next post, we’ll discuss how you can attract these individuals by direct mail.
If you believe your business could do with a piece of the FREE PROFILING I mentioned, so you can find ideal candidates for your new customer acquisition campaign, then call me on +44 1535 654930 or email firstname.lastname@example.org