Are your marketing ratios out of whack?
A tenet of mathematical marketing is to watch the numbers. Here, there are four interesting dollar metrics to watch:
- R$(EC) – revenue from existing customers
- R$(NC) – revenue from customers new to the customer set in the current period
- M$(EC) – marketing spend on existing customers
- M$(NC) – marketing spend on new customer acquisition
When we start working with a new customer, we often evaluate the effectiveness of their marketing by looking at two ratios, the Revenue ratio and the Marketing spend ratio. They are
R = R$(EC) / R$(NC)
M- M$(EC) / M$(NC)
The R ratio is almost always much greater than one: most companies get the overwhelming share of their revenue from existing customers, sometimes by an order of magnitude. The M ratio, however, is usually significantly less than one: companies spend more to acquire new customers than they do to get more sales from existing customers.
This difference in spend raises the balance question: if so much more revenue comes from existing customers, why is so much more of the marketing spend allocated to customer acquisition? Customer acquisition is undoubtedly important. But for most companies their spending is out of balance with their revenue sources.
Another ratio we track is the inactive ratio: how does the number of new customers compare with the number lost through inactivity? A healthy company is one that is gaining customers through acquisition faster than they are losing them. A solid program to get new customers is essential. But balance is essential too. If too much of the marketing budget goes to new customer acquisition, then overall revenue will drop for lack of marketing to existing customers who are the major source of that revenue.
As more and more companies adopt mathematical marketing techniques and watch the ratios, I believe that balance will gradually be restored. Just as water seeks its own level, so too will marketing spend come more into balance with a company’s sources of revenue. It’s easier to market to existing customers these days, and as companies realize that, the pendulum will swing back.
Do you know the right ratios for your company? Are you swinging back into balance or away and out of whack?