S6 E11 Advice from business’s best thought leaders made easy to understand and practical to implement - Jeremy Gray
Season 6 Show 11
Advice from business’s best thought leaders made easy to understand and practical to implement
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If you have been following my recent shows in which we looked at startups that did not succeed you may have noticed that many of the companies struggled in getting the right balance between the Life Time Value (LTV) of a customer versus the Customer Acquisition Cost. Today we will dive deeper into this topic.
Let’s start with some definitions.
Life Time Value, sometimes called customer life time value is, as it sounds, the value of a customer to your business, over the life span you will dealing with them. I will use the example of a dentist to show how this can be calculated.
Suppose a dentist’s history shows that the typical customer visits 1.5 times per year. I know you should visit every six months but not everyone is diligent on maintaining this schedule. On average they have a minor procedure such as a filling or cavity every two years and more major procedure such as a crown once every ten years. The dentist’s records also show that the average customer retention period is ten years.
What is the lifetime value of the customer?
They will have 15 visits for check up, clean and polish. Assuming this costs $100 per visit that equals $1500.
They will have 5 minor procedures over the ten years at say $200 per procedure so that is another $1000.
The one major procedure costs $2000.
Therefore, the total lifetime value of the customer is $1500 for the checkups, plus $1000 for the minor procedures and $2000 for the major procedure. Using this simple formula, the lifetime values of the patient is $4500.
Many people will stop there. But in my opinion, this does not provide a full picture. There are costs incurred in providing these procedures, the dentist’s time, materials, direct support staff such as dental nurses, maybe anesthetists. So, to be sure you do not spend more on customer acquisition cost than the true value of each customer I would take into consideration the costs incurred.
Sticking with our dentist example the dentist could either apply the average margin for the clinic as whole, or if they wanted to be more precise the margin for each procedure. From my experience working with dentists there is not much money to be made from clean and polish, a lot more from fitting a new or replacement crown. To keep things simple, let’s assume our dentist applies the clinic’s average margin of 40%. Our $4500 lifetime value now becomes $1800. I hope you can see how important it is to take incremental costs into consideration. If you had stopped at the simple LTV calculation, you may have reached a conclusion that you could spend $2000 on customer acquisition and still be ahead of the game. Just to emphasize it is only the incremental costs of providing the service or product that should be considered. Fixed costs such as the rental of the clinic, receptionist costs, utilities etc would not be part of this calculation.
To sum up lifetime value = expected spend over the time you expect to support your customer or client, minus the costs of providing the product or service.
Now let’s turn our attention to customer acquisition costs. Staying with our dentist’s example. Assume our dentist has an advertising budget of $2000 per month across a range of channels. And on average these marketing campaigns attracts 5 new patients each month. So, the CAC is $400 per customer. And let’s say the dentist provides each new customer with a new electric toothbrush costing $50. That would bring the CAC to $450. You could refine this further by applying the percentage of first time patients who become regular patients. If the conversion rate is 90% then the CAC would be $495.
Our dentist spends $495 to acquire each patient who has a lifetime value of $1800. Divide 1800 by $495 and you get 3.6. Generally, this would be considered better than acceptable. Of course, it varies by industry, for example in providing software as a service a ratio of 3 to 3.1 is considered good.
It is clear why referrals are important in any industry, in our dentists example a referral from another patient costs the clinic only the price of the toothbrush to acquire. $50. Divide $1800 by $50 and you get at LTV over CAC ratio of 36.
This is why maintaining your brand is critical. Brand is often use when your customer’s refer or recommend you as someone worth doing business with. Whether that brand in this case is the dentist’s own reputation or the clinic’s reputation. Your brand is an important part of your business assets. As a solo consultant until now my brand has probably been my name. But as my business grows, I will need to transfer my brand to either my business’s name or my tag line. Practical Solutions to Difficult Problems.
After the break we will look at an article published by McKinsey & Company on how to optimize spending to maintain your brand. It’s called Brand strength or margin? Both!
Strong brands create trust and reduce the risk of mistakes. There was a show in the UK called “eat well for less”. The premise of the show was that a family agreed to eat, for one week, the foods provided by the hosts without being aware of which food was the brand they usually ate, and which was a substituted lower cost brand. Typically, the family members were not able to tell when their familiar brand has been substituted by a lower cost product, often a store own brand. So, although they may taste the same, many consumers prefer to pay a bit more to have a familiar and trusted brand of cereal on the breakfast table. This is the power of brand.
As an entrepreneur you may have a limited marketing budget so how can you spend this wisely to drive sales growth while at least maintaining your profit margins?
McKinsey argues there are three aspects to achieving this. Strategic allocation, tactical optimization, and an adaptive ecosystem. Which is fancy speak for finding out what works and what does not work for your business, and surprise, surprise using what works.
Strategic allocation just means aligning budget with your goals. You need to be clear on your goals reach more minority customers, improve our brand image, become more visible on social media. But what does that mean? The more precise you can be with your goals the more effectively you can manage your marketing budget.
Consider what drives value for your business today and in the near future. If you are just starting up it's possible that your sales are not generating enough margin to cover your fixed costs. In this case adding customers and generating more revenue may be your focus. Maybe you are more concerned with creating an image of your company in your potential customer’s mind. If your launch strategy is to start with a base offering quickly followed by the next generation offering, it could be that you need to be considered as innovative in your customer’s mind.
If you can link your product to a major event it might be beneficial to use any tie in that is available to you. For example, if you are in cosmetics, a designer's launch of the next season's clothes would be a good fit. Of course, these days many major events are curtailed in many countries.
It may be much simpler than that, if you are launching a new product or expanding geographically, those areas would be obvious areas on which to focus your marketing dollars.
For the tactical approach you need to get the right media mix. This is getting increasingly complicated as digital media is replacing traditional media such as TV advertising, print ads and direct mail. Do you understand where your potential customers go for their information? Which of course means you need to understand your customer’s demographic. Last week I talked about Fab an e-commerce site that was a pivot from an earlier business. The earlier business had targeted gay men but when it was closed down the founders were surprised to learn that 50% of their customers were women. Had they known that they could have expanded their focus on attracting more female customers. You need to be advertising where your customers are looking. “A simple how did you learn about us?” can provide you with a lot of useful information.
Brian Grevy a board member of Adidas for global brands, says of marketing to Gen Z. “Customer loyalty is decreasing and this is partly related to the way that young people use media. Gen Z rarely watch linear TV, but they watch personalized platforms such as Tik-Tok or Instagram. Engagement often starts with an inspirational story on social media.”
A 2018 article from Harvard Business review provides guidance on how to connect more closely with your customer, how to be more inspirational for your target audience.
I am sure many of you will be familiar with the classic 4Ps of marketing, Product Price, Place and Promotion. But that reflects a business environment that no longer exists. Sitting at home I have an endless choice of products that I can buy from almost anywhere in the world. Your potential customers can be almost anywhere, they will change as circumstances change and you need to be able to connect with them in a different way. This article from the Harvard Business Review suggests a very different 4+1 P’s.
The first 4 Ps suggested by HBR are:
Purpose: Customers feel that your company shares and advances their values. One of the great things about being an entrepreneur is that you can develop a company that reflects your own personal values. And today, you can connect with potential customers who are aligned with your values using social media.
Pride: Customers feel proud and inspired to use your company’s products or services. I am sure you are proud of your company’s offerings, and communicate that pride in your advertising.
Partnership: Customers feel the company relates to and works well with them. As an example, I believe Amazon does this extremely well. When I place an order with Amazon, I usually have a choice of delivery options. Personally, I am a pretty laid-back guy and I am usually in no hurry to get the goods, so I will generally choose the lower cost, slower delivery option. In contrast my wife is a I have to have it now type person, so she will inevitably choose the fastest delivery option. One company meeting the needs of two totally different personalities.
Protection. Customers feel secure doing business with the company. Again, probably no better example than Amazon. If I order from Amazon, I know the goods will arrive as advertised, and if they do not, Amazon will make it right.
The fifth P suggested by HBR is Personalization: Customers feel their experiences with the company are continuously tailored to their needs and priorities. I am a fractional CFO and therefore provide services to several clients. An important part of client retention for my business is making sure each client feels that I am dedicated to them. I was on an international call with a client a couple of weeks ago when the other party asked me to explain my role within my client’s company. I explained my part time role, when my client added, part time but always available. It will be different for your company but if you can make your customer believe that their needs are important to you, you are well on your way to success.
If this all sounds a bit complicated, do not worry as an entrepreneur your mindset is likely well attuned to be a successful marketer. The best marketers are able to build a brand, scale it for growth and cultivate long term success.
As an entrepreneur you are totally committed to your company. You believe 100% in your company’s mission. You are devoted to its success. What you need to be able to do is communicate your passion to the world. Well maybe not to the world, but your target audience. As part of your planning, you will have identified your target audience, so you are already well on the way to be a successful marketer.
Reading a Forbes magazine article this week I found this catch phrase which I thought summed up good marketing. It was “Confuse, You Lose” If you cannot keep you message clear and simple, you will lose customers. As you have developed your business plan, and your product or service offering you have probably gone through several iterations until you got it just right. This will have given you a crystal clear vision of what your business is and what it does.
You have the three key elements to develop a marketing strategy. You know who you are, what you do and who is your target audience. This will allow you to develop your core message. This might take you a few hours to refine, my recommendation is that you write this down, using pen and paper, not on a computer. There is something about using longhand that clarifies thinking.
Keep in mind the advice from McKinsey and the 5Ps from HBR and you will develop a targeted marketing strategy that ensures your customer acquisition costs are far below the lifetime values of your customers.
Now we will look at another article from HBR that provides advice on how you can help your team to solve problems.
As the leader of your company, your team will sometimes come to you for help in solving problems. And while tempting, it probably is not ideal to give an immediate answer. After all, you may not be solving the real issue. And you may not have all the facts.
Instead, this article suggests you ask your team members three questions.
What would you recommend? This should not come as a surprise to your employees, as part of regular coaching you should be asking folks to come to you with solutions not problems. This is not laziness on your part, folks on the front line know more about the situation than you do, and they often know the solution but are reluctant to present their ideas.
If the employee does not offer a solution, take the time to talk through the issue and help them think through potential solutions. With luck you may come up with more than one solution.
And that leads on to the next question. How can we test that? Keep in mind that at this time you have a hypothesis, how can you prove, or disprove that the hypothesis is correct. Develop a plan that allows you to test the solution at minimal risk and cost. This follows the six sigma methodology of Plan Do Check Act. You have your plan (proposed solution) Do – implement it in a controlled way, Check – see what happens and then Act – scale up the solution if it is successful, go back to the drawing board if the results are not what you anticipated.
Finally ask your team what do they need from you? For you as the leader of your company this is the most important question. It is the part in the problem-solving process that you are uniquely able to play. You control the resources of the company, and it is your decision if the cost of solving the problem is worth the investment.
Your team will likely need guidance to ensure they have considered all aspects of implementing the solution. It’s a good idea to consult widely here. Although your testing should have identified any unintended consequences its not a bad idea to review the plan with others. Be rigorous in understanding the resources required. Cost and time are often under budgeted. And avoid another nemesis of this type of project scope creep.
Finally a change of topics as we examine an article published in the September/October edition of the Harvard Business Review. Chia-Jung Tsay, an associate professor at the UCL School of management analyzed the outcomes of 19 venture pitch competitions to determine what factor was the most important predictor of success. Her conclusion In Entrepreneurial Pitches Stage Presence is Everything.
How did she come to this conclusion and what does it mean to you as an entrepreneur?
Professor Tsay’s methodology was to ask 1,855 study participants to predict the winners of the 19 venture pitch competitions examined. The participants were assigned to review the contestant’s presentations in various ways. Including Videos with sound, silent videos, sound recordings, and transcripts. Her findings? The participants who watched the silent videos were the best predictors of which entrepreneurs got funded. A remarkable finding, folks who did not hear or read the content of the pitch were most likely to predict the winner. Her conclusion: Stage Presence is everything.
Ask most investors what the are looking for in selecting a business to back and they will tell you they focus on interesting ideas, talented founders, and substantive business plans. But Professor Tsay’s findings were that people could predict VC funding decisions based not on the content of the pitch but how the pitch was presented. Body language and facial expressions were the most important indicators of success. Remarkably she found that people watching the silent videos only took a few seconds to identify which pitches had been favored by investors.
Professor Tsay took steps to ensure her research was normalized to take into account facts such as, people tend to like people who look like themselves. She found it seemed to less about gender, race or attractiveness but more about a dynamic visual presentation that conveys passion and energy. She also tested the participants' response for bias. Finally in case the participants not being experts in Venture Capital were maybe missing something that the experts could see, she ran a study using experienced entrepreneurs, angel and repeat crowdfunding investors and found the same results.
What does this mean for us as entrepreneurs when pitching for funds? It seems VCs make snap judgements based on what they are seeing rather than what they are hearing. But it is unlikely the investors were aware of the strong impact that the visual cues were having on them. Entrepreneurial success comes from passion, engagement, and energy, and you can show all these traits without using words. If you are well prepared for your pitch it will show in the way you carry yourself as you walk into the room, how you present yourself.
Preparation remains important, if you are not confident you know your stuff it will come across clearly to your audience. Acknowledge the importance of the visual impression you are making, especially at the start of your presentation. Consider how you can convery your passion for your idea in a way that is genuine to you. Create inspiration without saying a word.
Professor Tsay’s research was focused on VC pitches but I have found that good presentation skills are a driver of success in many fields. I have seen careers advance because the person was an excellent presenter, even if there was no substance behind them. The so-called, empty suits in GE speak of the 90s. And I have seen careers held back because of poor presentation skills. If you feel your presentation skills are weak, there are plenty of tips, ideas and videos on the internet that can help. And of course, there are professional coaches available.
Do not let poor presentation skills be a stumbling block to your success.
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