NEW CUSTOMER ACQUISITION: PRIME YOUR BUSINESS
FOR NEW CUSTOMER GROWTH [PART 1]
On today’s episode, we have Mike Ferranti, Founder and CEO of Endai. This episode is the first part of our six-part series on The (Real) Cost of Customer Acquisition and How to Do it Right. In part 1, Damian and Mike give a high-level overview of customer acquisition.
Mike kicks off the interview with a story from a CEO round table that shapes the rest of the interview. Spoiler Alert: no matter how large a company, there is always the need for net new customers.
Mike then tackles the question, “What is customer acquisition?” This might seem simple, but it isn’t—thanks to how widely companies differ on the meaning of “new customer.”
Damian asks the question that every business needs to ask themselves: “What is the strategic value or importance of customer acquisition?” Mike responds with a simple breakdown: “A strategy is informed by where you want to take your business in the future—and what creates your future is net new customers.”
The conversation then turns to how companies that do customer acquisition well have a different valuation than businesses that don’t do it so well. Damian and Mike each share real-world examples of companies that have different valuations because of how they view customer acquisition.
Mike addresses the very important question, “What does success look like when you are doing customer acquisition really well?” with a breakdown of what he calls “signs of life.” If you can identify signs of life, you can avoid stopping a campaign before you should.
Finally, Mike and Damian discuss the spectrum of time, effort, and money that should go into new customer acquisition for any size of business.
There is a ton of information in this podcast—and it is only Part 1 of 6.
What follows is a lightly edited transcript of Episode 7 of the Inevitable Success Podcast with Damian Bergamaschi and special guest Mike Ferranti. (Listen Here)
Damian: Welcome to the Inevitable Success Podcast, sponsored by BuyerGenomics, where our goal is to help you, the marketer, make success inevitable. Each episode will discuss the craft of data-driven marketing, helping you uncover new and profitable ideas. You will also learn what works and what doesn’t work from top marketing professionals and thought leaders. I’m your host Damian Bergamaschi, and inevitable success starts here.
To kick this off we are going to have a several-episode discussion about customer acquisition and we’re going to go into a few different topics:
What is it? Why is it valuable?
In later episodes we’ll go deeper and talk about:
What is the real cost of acquiring customers?
How do you evaluate the scalability of customer acquisition?
We’re also going to think about the quality of the customers that you acquire, how that factors into the equation, and, ultimately, how you calculate the ROI. There are so many different ways to do that.
To make it as actionable as possible, the last episode will be how to do it. We will cover the steps required to go out and build a best-in-class customer acquisition program.
Mike, a little bit earlier you were telling us a story. You were recently at a round table event full of very experienced direct marketers and CEOs. They were asked the question, “What keeps you up at night?” and they all had the same very interesting answer.
Mike: So I’m at a CEO’s invitation-only round table, and I’m surrounded by a group of very experienced top-level executives from brands that are very well recognized for their ability to acquire large volumes of customers. These are the best in the business. There was a moderator at the table who said, “What’s the one thing keeping you up at night? A few folks said, “How much time do you have?” But the overwhelming answer when he went around the table—and there were about nine CEOs there, with very different businesses different models. They didn’t have a lot in common other than they were all marketing-driven companies, and all had a high need for net new customer acquisition, at least in order to keep up with their growth goals.
One by one, as we went around the table, every individual paused, thought for a minute and said, “Customer acquisition.” When we went nine for nine that really surprised me. After as many decades of doing it as these folks had, having seen every technology solution and media format before the Internet and after the Internet, every single one said customer acquisition was their number one priority and it was the thing that kept them up at night most.
The biggest reason that all of these organizations had customer acquisition as their priority is because it’s really the lifeblood of the business. Now, acquiring customers, and that being the number one thing that keeps all of these folks up at night, could come in many flavors or for many reasons. The biggest is, “Why am I not acquiring enough?” These companies were large enough that it was not realistic that they weren’t acquiring any, but they might not have been acquiring the volume that they were looking for. They might not have been acquiring the customer they wanted in terms of customer value or potential value, and they might not have been acquiring customers at the right cost as defined by their unique situation, their product, and their category.
What was equally surprising—and again this was a very candid moment in a private environment—was that, as they tested new approaches, vendors, agencies, etc., more than one of them said nothing works.
Damian: That is interesting, because if that were true it would imply that nobody has any customers.
Mike: Right. That harkens back to, “I’m not getting customers at the right cost,” or “I’m not getting the volume of customers I need to hit my plan for the year,” or ” I just don’t like the quality of customer and the value that those customers are producing.” But the big takeaway is, in that little experiment that we all inadvertently walked into, the answer was that customer acquisition is the number one priority of top execs even at organizations that have tremendous reputations for effective marketing scale. They had brands, they had it all, but customer acquisition was still the number one objective.
Damian: I love this topic because for many it is simple, but not easy. There’s a simple methodology to it but it is difficult and you have to be a professional or have the experience to do this really well. Because it’s hard, you can create so much value if you’re really good at it. This is one of those problems you want to lean into and not cover up, and look at in the aggregate.
So let’s dive into it a little bit deeper. Sometimes people will say “customer activation,” “customer acquisition,” or “new customer acquisition.” Let’s talk a little about what this means to different brands.
Mike: “Customer acquisition” implies acquiring a customer you didn’t have before. That would also imply that you could determine whether that customer is one you had before, because you can identify them. Now I would say that’s become more doable. Digital has certainly made that easier, as has mobile and all the other technology waves. But many organizations still struggle to identify whether someone is a new customer, a repeat customer, or if they’re a repeat customer that just hasn’t been around for a very long time. So “new customer acquisition” generally refers to a net new customer, though the definition of “new” can vary by category and specifically by brand. We’ve worked with brands who might say a net new customer is one that hasn’t made a purchase in x months or years.
Damian: For example, with BuyerGenomics, once you hit a certain statistical window that you will not purchase again, you’re not going to be a customer.
Mike: That gets to inactivity or attrition. When it comes to attrition many brands are familiar with reactivation programs, but how they treat a reactivation varies fairly significantly. Some brands will say any reactivation is a net new customer for us, and that’s fair because if they’re truly inactive, they’ve missed multiple purchase windows—again assuming that brand has the analytics in place to know what that number is. But if the customer hasn’t purchased in a very long time for that brand or for that category, it might be very different. The frequency with which you would buy a car versus when you would buy apparel or shoes varies tremendously.
It’s fair to say that it is an acquisition when you reactivate a customer who has been dormant. The economic value once that goes to zero—statistically speaking we know it’s gone to zero—that’s what it’s really all about. New customer acquisition is about opening up both new revenue now and the potential for a new revenue stream from that individual or household over time. That’s what makes customer acquisition so incredibly important for every organization.
Damian: Let’s talk about the strategic value of new customer acquisition. Certainly, there are many.
Mike: The number one strategic value is simple. If a strategy is what gets you from one state to another in a business, what you’re talking about is where you watch today versus where you will be in the future. What creates your future is net new customers, in large part. Obviously, you have to have the right product, you have to have the brand, and you have to have good service, but if a business is to grow—generally speaking—it must add net new customers. We’ve spoken at length about customer value and the impact that high-value customers can have in terms of their spending. But for a brand to truly grow, it has to enter new markets and new geographies. Minimally, it would have to dominate its niche. If you’re going to dominate your niche you need to figure out who’s in it and how you reach them, and then you have to acquire them as customers.
If I do a good job with all the other things that I suggested are “table stakes,” then I would have to do something else so well that I generate referrals and social shares, and grow my brand that way. But net new customers are going to shape what the future looks like for any business or any brand; that is probably the most important strategic value of the net new customer.
Damian: Another part of it is that the valuation of the organization is a little different if you’re really good at new customer acquisition. Let’s do a thought experiment: Say you have two businesses that each added a million dollars in revenue. If the revenue increase for one business came entirely from new customer acquisition, and for the other it came from increasing the value of their current database, that’s a very different valuation. One has proven that they can add seven figures of revenue from new customers, and the other one is able to monetize their base. Both are very valuable, but different.
Mike: It’s funny you mention that, because there is a growing belief (and in my opinion it’s probably a sure thing) that as norms, standards, and ways of acquiring customers, measurements, and analytics become more and more standardized, Wall Street ultimately will be evaluating companies in part on the rate of acquisition and the value that they extract from those customers. Both of them are really important today.
There have been some pretty famous examples of how folks have influenced their stock price through their treatment of the cost of acquisition. The most famous example was Groupon, when they simply deducted the cost of customer acquisition. That went on for a while. They only showed the revenues that those customers produced, which is funny for a direct marketer. They effectively capitalized the cost of customer acquisition, which sounds great. Maybe a decade or two from now that will be a thing. But according to generally accepted accounting principles, that’s not a thing yet. But obviously that made the financials look a lot better. What that gets to is how enormous a factor customer acquisition is—its costs and its impact on the business in terms of revenue. Arguably this is another way of looking at it, but it gets to the fact that it’s not just a big thing, it’s pretty much the only thing that a lot of brands—if not all of them—must have at the center of their focus.
Damian: I can think of one more example. I was recently reading an article about Robinhood, which is the free stock trading brokerage, and at this point they have the market cap or the valuation similar to the brokerage accounts that have billions of dollars in assets under management. The simple reasoning for it is that for a big brokerage house, they have to spend three to six hundred dollars to acquire a customer. Robinhood is doing it at something like a dollar or two dollars, even though they make so much less. Think about the economics and the finances of funding that type of growth. It is a completely different ballpark.
Mike: In that example, I would say it’s a relative to their competition. Robinhood has a much less traditional model in that they give away the product. So they’re doing a “freemium” model.
Damian: In the eyes of the consumer. But they’re still making money.
Mike: That has lowered their cost of acquisition pretty substantially. It’s hard to argue with, especially for the early-stage customer they’re looking for. Of course, that might just get your attention. But they have another product that’s paid. So they’ve done a really good job at changing the model, and the offer positively influences the cost of acquisition. If your customer acquisition costs dropped to a dollar in a category where the value is measured in many thousands, you’re obviously doing something really well.
Damian: That actually is a great segue for my next question: what does it look like when you’re winning at new customer acquisition? Give us the high-level overview, since we’re going to go deeper on some of these metrics in future episodes.
Mike: It comes down to analytics. The metrics that will scream loudest that you’re doing a good job are CPA or CPO, “cost per acquisition” or “cost per order.” That is at the bottom of the funnel. That means you’ve acquired the customer.
“What is that CPA?” is the next big question. You have to have a target CPA. That’s a very important metric because without it you can’t really know if you’re winning or not. Then you have to be able to define what that target CPA is; you need a rational amount. A lot of brands will say that target CPA is, “I made a profit by acquiring that customer.” Other brands will invest the entire profit of the first customer and make a profit on the second sale. Now that requires a different model that requires that you are thinking about how are you going to get from one to two, and that you acquire a customer that has a higher probability of going from purchase one to purchase two.
The other thing is, you could look upstream in the funnel. You can think about cost per engagement, cost per impression, or view. The earlier-stage activation metrics—if those are good and you’re advertising, you’re messaging, you’re branding, and you’re creative—is that the cost should come down at the top of the funnel, which can help at the bottom of the funnel if you’re doing a good job there as well.
Damian: So how would you know it was good?
Mike: It’s less than it is for other vehicles or mediums that you’re testing. If you can get the engagement at a lower cost on a like target, that should push you further down in the funnel—for fewer dollars.
The other question, related to yours, is that folks have said “What should the CPA be? What’s a great CPA?” or What’s a great cost per order in my category?” The honest answer is “It depends.” A great CPA would be one where you make a healthy profit on the first sale, but that may or may not be the norm for your industry. Industry aside, you have to look at where is that brand and what is the relative strength of that brand compared to substituting competitors.
If you’re an upstart in the category where there are giants that customers long for, because of the brand, the relationship, and the success that they’ve had, it would be hard to say that I have to perform at their level. Your first objective is to get people to try you, to have a good experience, to talk to their friends about it, engage in social sharing, etc. Then you want to get them into a second sale, which gets to another great metric: the rate at which customers make a repeat purchase. Now that’s not acquisition anymore, that’s loyalty. You can’t separate the two, because it allows you to invest in acquiring a greater swath of customers. That’s one of the ways to get scale. Customer value really cannot be disconnected from customer acquisition and the cost per customer acquisition.
The other thing that we like to say about cost per order is that there are different phases of assessing cost per order. If you’re testing a new campaign or a program, you may or may not expect it to perform the same as a mature campaign that has been optimized and proven over time. If it’s a net new vehicle, a net new search term, a new ad campaign, new products, or a whole new look—anytime you introduce something new you’re into an experiment. Like it or not, it’s a marketing experiment, and the brands that realize that are more likely to say, “What I’m really looking for here is not to outperform my prior cost per order. First, I want to see if there are signs of life. Now if I outperform it I’ve got signs of life and then some.”
Brands, especially those that don’t have a great competency in net new customer acquisition, are the brands that are more likely to dismiss those signs of life and inadvertently create limits. These are serious limitations on their ability to stack up channels, outlets, and vehicles through which they can acquire new customers. Signs of life starts with “Did I acquire any customers?” “What is my deviation from my cost per acquisition and how far is that deviation when compared to where I started on other programs?” If you don’t have that knowledge or history of the effectiveness of one campaign versus another, especially at the early stages, then it’s harder to say how far you really are.
If we’re quick to dismiss a program that demonstrated signs of life, to having a viable CPA, and a scalable source of sales, then we might miss the opportunity altogether and just kill the program that doesn’t look like it’s working.
There’s an expression they used to use in direct mail that said “now or never.” It made a lot of sense because you might be out-of-the-money substantially on a high-price direct mail campaign, meaning your cost per-orders are far from where you would expect them to be or where you need them to be. If your cost per order is $50 and you just brought them in at $1200, there’s not a lot you can do because your fixed costs of sending direct mail are so high that it gets hard to prune away that much cost. You’re always going to have that large fixed cost piece. Also, at that time, maybe the targeting wasn’t as comprehensive as it is today.
In the digital age, and surely for digital marketing where most folks have upped their investment, your ability to optimize is much greater. The granularity with which you can measure is much finer. Your ability and the speed and dexterity to know the customer that you did get and to target the prospect you pursued is substantially faster, and in some cases is much greater. This is why it’s really important to look for signs of life, because your ability to optimize is better. If you’re not doing that you’re going to pass on a lot of things that the best competitor in your category is not going to pass on. And if they’re working their way into an acceptable cost per order and you’re not, you’re at a competitive disadvantage.
Damian: There’s typically a pretty decent “moat” around solving customer acquisition, because brands have an apprehension to spend on it. That is because everything they do now is going to be a test—it’s not going to perform as well as the legacy programs that they always run.
I have one last point to cover. What percentage of your time, your effort, and your budget should go into new customer acquisition? There’s probably a spectrum—if you don’t have any customers, then probably 100 percent of your time should go into it, and if you have every customer you shouldn’t spend any time on it. But for all of that gray area in between, how do you think about this? Is there a formula?
Mike: The first rule is: What are your goals? If your goals and objectives can be achieved primarily through using your existing customer base, maybe it’s not the most important thing for that particular brand.
However, I would say that it’s always important, because the future of your business is defined by the customers you have, not only today but over time. There’s a natural progression in which folks have a viable customer lifetime, and they’re moving through these life stages. Whether we like it or not, they age out. They go from a consumer who has no children, to one that is married, and to one that has children. This is an inevitable set of changes that happen in every customer base and their buying behavior changes very much. They give up sports cars, motorcycles, and travel for daycare, doctor’s visits, children’s toys, and education, and all these things that weren’t important before. If those changes impact you as the marketer, which they will, then you need to be acquiring those new customers. That’s why I say every brand has to have a very serious focused effort on acquiring, and if their objective is growth, on scaling net new customer acquisition.
Even if it’s not your number one objective, it still should have a pretty substantial degree of focus in the organization. I go back to the story we started with, that nine of the best in the business said customer acquisition still keeps them up at night. It is universally difficult. It is universally difficult because there are so many competitors in the digital age. Every one of those competitors, even in a brick and mortar store, is a click away on a mobile device. Advertising has moved ever more to a bid-based model in which the more competitors there are, the higher the cost of advertising and marketing.
It hasn’t gotten easier—it has in some regards because of measurement—but it favors those who are committed to a metric plus a creative problem-solving approach to customer acquisition and scaling net new customers. It’s always got to be important because it’s a challenging topic that every business will be affected by.
Damian: Very similar to that, it depends on where you’re at as a business. If you don’t feel good about your investments in new customer acquisition, you probably have an emotional reaction to whether you’re doing well or not. If you feel very good about it, then it should probably be a pretty material component to your budget. If you don’t feel good about it then…
Mike: You probably should work on your product.
Damian: They say the best marketing is actually working on your product.
Mike: Happy customers.
Damian: If for some reason you haven’t cracked customer acquisition, you should probably have some budget to figure it out.
Mike: That’s a great point because most folks have a budget for acquiring customers. That budget usually looks like, “A customer is worth $500 to us. Therefore an acquisition is worth $94 to us. And this year our plan is to acquire one hundred thousand new customers. So we need $940,000 for our customer acquisition budget.” But what that leaves out is the thing that you just said, which is figuring it outright. The “figure it out” part is what keeps those nine experts up at night.
Everybody’s always figuring it out because the constant that we all experience in net new customer acquisition is change. The competitive set is changing, the costs are changing, the customers are changing, your product is likely evolving and changing in some way, and with all this change you have a substantial amount of figuring out to do. So if you’re a brand that hasn’t done well at all, you first need a budget to figure it out, and second, a target for a number at a cost per.