Solving an age-old problem
Marketers continue to puzzle over how to divide marketing dollars between recruiting new customers and keeping their current ones. They know they must spend money to keep current customers and get more sales from them. But the chase for new business is important too, and demands investment. It’s a dilemma that is often swept under the rug. But there is an answer.
A lot of marketers do their allocation with the oldest tool in business: seat of the pants. Even though most of their revenue comes from existing customers they tend to spend more where they think the action is – on customer acquisition.
The best practice is to apportion marketing dollars according to how much revenue comes from each group. To simplify that process we’ve developed a formula that does the job.
Our new white paper lays out in detail the math and the formula [ X = R/(R+P), where X is the percent to spend on existing customers ] . If you’re interested in optimizing the way you spend marketing dollars it’s worth reading.
In our formula “R” is the ratio of revenue from existing customers to new customer revenue. For most B2B companies the ratio ranges from 2:1 to 20:1, but can switch to 1:10 for an ecommerce company.
However acquisition is more costly, perhaps 5 to 8 times more expensive than marketing to a house list. Therefore our model includes an acquisition penalty “P“ so that we can arrive at an optimal budget that lets us continue to acquire new customers at the same rate as before.
When you’ve done your calculations, what is the best way to apply what you’ve learned? First, check how closely last year’s marketing allocations match the optimal division recommended by our model. Second, if you want to change your ratio of revenue from existing and new customers (say you want more revenue from current customers), you can use this formula to adjust your spending.
Try it out and see whether your ratios are on the mark. Check out the examples in the white paper to compare your spending decisions with some typical companies.