In our “The New Direct Marketing” course, there’s a slide with the following text:
The Database Marketing Business Model
“Acquire new customers, almost always at a loss, in the expectation that the present value of their future contributions will exceed their acquisition costs, and, in addition, manage new customer acquisition expenditures consistent with fiscal sales and net income objectives.”
And, until the internet bubble burst, we would joke that the eCommerce Business Model looked like this.
The eCommerce Business Model
“Acquire new customers at a loss, always, in the exception that no one cares, provided you spend enough on new customer acquisition, so that the possibility of making a profit, by accident, is minimized.”
A long time ago, this business model made sense, at least from a stock valuation perceptive. The more you spent on customer acquisition, the more customers you would have — no argument there — so that when the big shakeout came, your company would be left standing – while the competition slipped away into bankruptcy.
Remember when they said that if you were showing a profit, you were not investing enough in the business?
Well, those days are long gone. The question every dot-com company President is asked on CNN these days is when will your company turn a profit, and an answer of more than another four quarters is frowned upon.
So now all dot.com e-tailors are direct marketers or retailers without a store, which is another way to define a database marketer. The implication for these new players, let’s call them edirect marketers is that if they are to survive they need to become fairly sophisticated direct marketers, and they need to do so fairly quickly. Which means exactly what?
For starters, it means that they must learn to measure (or at least estimate) new customer acquisition costs by acquisition source, just like any other direct marketer must do in order to grow their business.
Now, admittedly, in a multi-media environment, when a company is running Web advertising, TV, radio, print and direct mail simultaneously in multiple markets, measuring the effectiveness of each is easier said then done. But, there’s no choice. Unless you understand the effectiveness of alternative acquisition sources, or acquisition strategies, you don’t have the ability to intelligently manage the allocation of your acquisition budget.
What’s more in addition to measuring cost per new customer, it’s equally important to be able to measure the value of the customers you are acquiring. And, as suggested above unless the average present value of the average customer exceeds the cost of acquiring the average customer, the business is inherently unprofitable.
And here’ the rub, for new edirect marketers it’s exceptionally hard to measure and project the value of customers by acquisition source, in fact it’s exceptionally hard just to measure and project the value of the average customer –period—even without regard to source.
Why is it so hard for e-direct marketers to measure customer value, or stated more accurately why is it especially hard for edirect marketers to measure and project customer value? Or, stated still another way, why is it harder for them, then for a traditional direct marketer?
If you’ve been reading carefully you may have noticed that I’ve always linked measurement with prediction. Why?
Because in order to use the notion of lifetime value you need to be able to predict future behavior based on measurable behavior to date. In truth, it should be no harder for an edirect marketer to measure customer behavior, measured at any level, average, by source code, by campaign, or by enrollment group, then it is for a traditional direct marketer.
They just don’t know, as far as I can tell from talking to the internet marketers that attend our seminars, that unless you’re tracking customer behavior, multiple ways, you have no way of knowing the real profitability of the business you’re managing. Nor, do you have any way testing and measuring the effects of alternative marketing strategies.
What’s even harder and truly different for edirect marketers is the inherent lack of loyalty of the e-customer. Amazon.com aside, customer loyalty among Internet users is an oxymoron. Part of the fun of being an Internet shopper is finding that new site, it’s about surfing the Web and just because somebody stops by and buys something from you once, or even every once in while, does not make that buyer a customer, or a customer with a significant predictable lifetime value.
It’s the traditional catalog one-time buyer problem, but magnified multiple times.
Because of the inherent disloyalty of the Internet shopper it’s particularly important that the edirect marketer go out of his or her way to develop the beginnings of customer loyalty, or in even more traditional dm terms repeat purchase.
What does this mean, in concrete actionable steps?
It means that a nice welcome back on your site, is mandatory but certainly not sufficient. It’s expected, therefore like an expected increase in interest rates, the market has probably discounted it. It means that routine e-mail messages, Facebook updates and Tweets probably won’t be sufficient to maintain customer loyalty, because everyone does it, and does it about the same way.
It means that customer cultivation will require using a combination of new and old direct marketing tools including direct mail, contests, events, reward programs, and customized Web sites for repeat customers. It certainly, most emphatically means, that you just can’t sit back and wait for that “one time visitor/buyer” to come back on their own.