Customer Acquisition Cost Reduction
Being good at marketing cannot make up for bad economics.
If your new customer acquisition cost is greater than what that customer will spend, then you've got a problem. Your business will fail. Your customer acquisition cost is too high. So how should you reduce it?
It Costs More to Acquire a Customer Than it Does to Retain That Customer
Most marketing experts will tell you that your 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.
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?
Customer Acquisition is Needed to Grow
Customer acquisition is needed to grow our businesses. So if you are in a growth phase, you’ll be spending more on acquisition. Conversely, if you have products in decline, you’ll be focused on keeping 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 your finding and keeping strategies.
So, what steps should you take to identify and clone your best existing affluent customers?
The 80:20 Rule
Make a list of the customers who spend the most. In a spreadsheet highlight the top 20%.
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 top 20%, correct?
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.
RFM Analysis
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 very 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, hopefully.
Now, Let's Look at How You Can Match Your Data to The UK High Net Worth Database
Data Matching
Do you sell products or services to the affluent?
Such as investments, loan notes, property investments, gold, FX, premium insurance, charities, will writing, health care, interior design, luxury products, furniture, fine dining restaurants, experiential events, yachts, 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 individuals are to you.
Match Your Data to The UK High Net Worth Database
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.
By matching at initial and surname level, which means there would be a match to your client Mr Jasper Hanson, if it matched to J Hanson at the same address.
Finding Lookalikes
If the percentage of matches 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 Jasper 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 in 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.
Cost Effective Customer Acquisition
The clever thing about this is these people become visible to you. They are no longer invisible prospects.
Trying to find and attract them using other ways is a very costly exercise. Other ways like newspaper advertising. Yes, the affluent are higher than average consumers of newspapers, but readership is declining.
The affluent do use social media. More so since Covid. But there is a very high likelihood that few of your top 20% will be readily contactable through social media.
Profiling Costs
When profiling or simply de-duping against The UK High Net Worth database there is no cost.
Your cost kicks in when you use the data in email, mail and telephone campaigns.
Media are not created equal. For every 100 names and addresses, you'll find roughly 40 telephones and 30 emails. So, if you jump on the phone with Finely Fettled and mandate you are only interested in email, what you are saying is I'm only interested in 30% of the potential leads available to you.
New 2024 Email Strategy
There are good ways to use email though. An open is akin to demonstrating a slight interest. So it splits potential responders from non-responders. Consider doing a large email campaign to create an interest-audience that you can then follow up by mail and or telephone.
The affluent read more, they trust mail more, they get more emotional about mail offers. Mail is more memorable.
Affluent people tend to be older - often over 50. 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.
Measurement
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.
Next Steps
How good would you feel if we identify a cohort of HNWIs who look JUST like your best customers. Imagine you had a value proposition that appealed exactly to these individuals. And a marketing agency, hint hint, that could help you create a cost effective direct response customer acquisition campaign.
Call Graham Arrowsmith on +44 1535 654930 or email graham@finelyfettled.co.uk