Notes

I don't necessarily care about the
accounting,
but we all agree that customers are
assets.
So to the extent that customers are
assets,
what do you think about using a CPA
type metric when it comes to acquiring
assets.
Think about other assets that we acquire.
How about employees?
How about technology?
How about lawyers?
You think about those kinds of assets that
firms depend upon.
You'll never hear a firm say something
like, well,
she was a lousy lawyer but she was cheap.
Okay, when it comes to lawyers, when it
comes to employees, what are firms looking
for?
They're looking for the best, not
necessarily the cheapest.
So why is it that we use this
cost-oriented mentality when it comes to
our customers?
So my question is, instead of focusing on
CPA,
what is it that firm should be focusing on
instead?
Think about that for a second.
Instead of CPA, what should it be?
Say it all together with me?
Exactly, VPA, Value Per Acquisition.
We should be focusing on the upside that
the customers can provide to us.
And by the way, if you just think the
notion
of value per acquisition, what does that
sound a lot like?
An idea that we've already discussed.
Of course, that's CLV, Customer Lifetime
Value.
So let's think about the upside potential
that customers have.
And then use that number to
drive the, the, the CPA, okay.
So, so we are going to kind of flip the
equations around.
One way of thinking about customer
lifetime values, certainly
this is the way a lot of text books
present it, the way a lot of companies
think
about it, is that CLV represents the upper
bound.
I willing to spend up to that amount to
acquire a customer.
Makes sense, right?
I certainly don't want to spend more than
that,
because then I'm losing money on the
customer.
But,
but, this, the, CLV is basically a
ceiling.
I'm willing to spend up to that amount.
And that's what I want managers and
companies to think about.
Here is this ceiling.
This is what I think the customer will be
worth.
How much of that money am I willing
to spend to acquire that customer, and
then how
much of that money do I want to keep and
give to my shareholders, as current and
future profits?
So when it comes to thinking about
customer acquisitions, I don't want to
focus on floors.
I don't want to focus on how low can we
bring it.
I want to focus on ceilings instead.
Okay, I want to understand how high we can
go.
And I'm not saying that we should
necessarily spend every penny up to CLV.
Well, we're not aspiring to spend more
money, that's ridiculous.
But the point is that if we focus on the
ceiling instead of the
floor, we'll be willing to spend a little
bit more money at the margin and
more importantly get better customers in
the process.
So let me give you a very specific
example.
[INAUDIBLE]
As I said, in the digital marketing world
the CPA
is so tangible, it's so observable to us
that any company
that's working with Google for instance,
is thinking very carefully about
what they are spending for every keyword
on Google sponsors search.
And, and they are wondering should we be
spending $4.50 to
get someone through this keyword or should
we be spending $4.49.
You have
all of these arguments about pennies,
about CPA.
And so there's a couple of companies that
are getting smart
about it and saying you know what, instead
of focusing exclusively on
what we are paying to get those customers,
lets look at
what we are getting out of those customers
after we acquire them.
In other words lets look at the CLV of
customers who we acquire through different
kinds of marketing activities.
And so,
over here you can see a screen shot of
just, just one article.
It's just I think a very nice typical
example of an
article and you can see just from, from
the title alone.
It's, let's understand the CLV, the
lifetime value of
the customers whom we've acquired through
Google sponsored search.
And let's understand how their COB is
different
than customers whom we acquire through
other channels.
And so with that I've given you all the
details
of, of the study, here's the highlight.
And it tell us, that, that as, as we sit
back and we look
at the data that we've collected on
customers acquired through different kinds
of marketing activities.
Those who are acquired initially through
Google sponsored
search, are worth on average CLV of about
$1000.
Where's customers acquired through other
channels are worth $200 or less.
So here we are, arguing about
pennies, or dimes, small amounts of money,
about how
much we'd, we, we should be spending to
acquire customers.
But we find out that there are these huge,
dramatic differences, hundreds
of dollars difference, if we use one kind
of tactic instead of another.
And CLV is the key.
CLV shows us, that there's so much more
value,
lying in our customers that we don't
necessarily appreciate.
And when we have this cost
orientation, not only we don't appreciate
it but we'll never realize
it, we'll never be able to put it in our
pocket.
So I really like this example, and I
wish that this example were more rule than
exception.
I wish that a lot of companies would kind
of
step back and do this kind of analysis for
their existing
customers, and it's not only a matter of
doing it
for say, Google sponsored search, versus
everything else, you can do
it any which way.
You can say, let's look at customers who
we acquired at one time period versus
another.
Let's get, look at customers who we
acquired through one geographic area
versus another.
Let's look at customers who's first
product purchase
from us was one kind of product versus
another.
Let's look at customers who we acquired
through one marketing campaign or another.
So we constantly want to be
tagging our customers, understanding
different characteristics
of how and when and where we acquired
them.
And then with a little patience, let's
match that
information up with what these customers
prove to be worth.
And so we're going to run some CLV models.
We need to wait a little bit of time.
We need to collect more data on them to
understand which
customers, or which groups of customers
are the most valuable ones.
But by doing so, we can really understand
those sources of value and get
a, just some great guidance about where
we,
we should be spending our next marketing
dollars.
So let me summarize this thinking about
customer acquisition.
First and foremost, you want to avoid
having a CPA mentality.
And, and, and I mean that not only, kind
of in a, in a
jokey way, because of course I'm also
referring to CPA's being certified public
accountants.
We don't want to think about bean
counting.
We don't want to think about pennies when
it comes to acquiring customers.
We want to focus on ceilings instead of
floors when
it comes to how we're going to spend to
acquire customers.
And the celebration of heterogeneity is up
by understanding the CLV differences
across customers, that's
going to give us some direct ideas about
where we should be spending the money.
And when we understand where the more
valuable customer tend to come
from, let's invest much more heavily in
those
search words, and those channels, and
those marketing campaigns.
There's no guarantee that every customer
that we
get through those activities are going to
be good.
In fact, that's not true at all, we're
always going to get a mix of customers.
The, the, the metaphor that I like to
use is that we're always fishing for our
customers.
And this is going to give you some idea of
where we should be throwing the lines.
And when we throw the
line, or when we throw out the nets, we're
going to always pull in a heterogeneous
mix of customers.
And you know what?
Most of them are going to be so, so
customers.
But if we can get really smart about where
we throw the nets,
we can tend to pull in just a slightly
better mix of customers.
And if we do that more often, if we do
that in a smarter way,
those differences can really magnify over
time,
and show us that there's acutally
tremendous value
unlocked by just being a, a better
fisherman when it comes to customer
acquisition.
So a couple of other points here.
Number one, companies need to be a little
bit
more patient when they're evaluating their
customer acquisition activities.
Too often, companies are looking for an
immediate payoff.
Okay so, we spent this money, what did we
get for it?
My point is if you're forward looking, if
you're
taking the long view as implied by
customer centricity,
then let's wait a little bit of time until
we can get a pretty good sense
of, of what their CLV, of what the value
is and what the CLV will be.
And that's going to give us not only
better guidance
but better idea of, of where to set that
ceiling.
The main point about customer acquisition
which I've been
implying, but let me say it very plainly,
is
that firms are under spending on
acquisition by focusing
so much of their efforts and asking all
the time,
how little can we spend?
They end up spending very little.
It becomes a self-fulfilling prophecy.
And by, by focusing on, on tactics and
methods, just bring
in as many customers as possible for the
least amount of dollars.
They also tend to under achieve, and
that's a problem.
So by being smart, by being careful, by
tagging and
tracking on customers, by focusing on CLV
instead of CPA,
we can get a lot more money.
We might spend more on acquisition, but
the, the,
the returns to scale on that are going to
be huge.
So that's my piece on customer
acquisition.
Let's take a step back now and come, and,
and talk about customer retention.
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