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Leads for Building Your Business

Direct marketing is both an art and a science. Knowing how to implement a fully integrated campaign requires a specific skill set based on experience and logic. Our campaigns deliver extraordinary results based on proven elements and components of direct marketing methodology which are and which will be included in our blog. Please feel free to add your comments and questions. Use this free information as a reference for generating leads to build your business.

Seven steps toward more efficient Reactivation of Lapsing and Former Customers

  1. Identify former and lapsing customers through RFM (Recency, Frequency, and Monetary Value) Analysis;
  2. Develop strategies and supporting tactics that bring former customers back;
  3. Leverage dealers’ and/or sales representatives’ productivity with lower cost contact methods;
  4. Track and measure results from direct response advertising, direct mail, e-mail messaging, telemarketing and personal sales calls;
  5. Evaluate sales and marketing programs with respect to their return on investment — primarily based on Lifetime Value;
  6. Improve accountability;
  7. Refine sales and marketing programs.

The Role of Lead-Generation Programs

  1. To build a bridge between the mind of prospects and the selling system
  2. The primary purpose is not to sell a product, but to generate a qualified lead
  3. The goal of each step in the selling system is to take the prospect to the next step — not to cut out steps
  4. The offers you make give the prospect an opportunity to say “Yes”; their affirmations give you permission to communicate with them again
  5. Properly created and staged offers help you know exactly where the prospect is in the selling system.

Cold Calls — A Costly Mistake

One of the most costly mistakes any sales manager can make is to use skilled sales people to make cold calls — yet it happens frequently.

Three critical things generally occur:

  1. The people being called on resent cold calls because unannounced calls imply that the calling company has no respect for others’ schedules.  When this happens, sales people reduce their chances of every meeting these people.
  2. Sales people who have worked elsewhere, where qualified sales leads were provided, won’t stay with a company that doesn’t offer the same.  They’ve been spoiled.  And they’re not as productive.  Even the very best sales people aren’t willing to tolerate high levels of rejection indefinitely.
  3. Overall marketing costs are much higher than those companies where less expensive media are used to identify and qualify sales prospects.

HoganDirect has identified and qualified prospects for our clients in a wide variety of businesses.  After opening prospects’ doors, our clients’ sales people have used their skills to effectively negotiate and close more sales.

The Importance of Lifetime Value

Lifetime Value defined:  

Lifetime Value is defined as the net present value of a customer over a specified period of time, discounted back to present day dollars at an appropriate rate.

By not tying proposed marketing and sales budgets back to Lifetime Value, top management in most companies rightfully considers these budgets as dollar outlays without any basis: expenses rather than investments.

Armed with this knowledge, your company will be able to determine exactly how much you should spend each year to acquire,  retain and cultivate customers, and reactivate lapsed customers.  You’ll also know how much should be budgeted to generate qualified sales leads. Best of all, you’ll be able to prepare and objectively analyze every marketing and sales budget from this time forward.

What others say about the importance of Lifetime Value:

“It follows that, if marketing expenditures can result in the acquisition of new customers who will generate value over future time, then that action is desirable even though the initial cost to obtain these customers might be higher in the short-term return on that investment.  Some might call this long-term return on investment, LTV.”                                                                               Martin Baier, Contemporary Direct Marketing.

“Step One: Figure out the lifetime value of a new customer.  Without this data it will be extremely difficult to compute what it’s worth to acquire new permission.”                                        Seth Godin, Permission Marketing

“You must know the exact cost to acquire a new customer and the exact lifetime value of that customer in order to be successful in direct marketing.”                                                                         Don Libey, Libey on Customers

“The ideal expression of actual valuation is customer lifetime value (LTV), the stream of expected future profits, net of costs, on a customer’s transactions, discounted at some appropriate rate back to it current net present value.”                                                                      Don Peppers and Martha Rogers, Enterprise One-to-One

“We believe the leaders in The Great Marketing Turnaround will be those companies that take into account the concept of Lifetime Value.  It will help justify marketing expenditures heretofore considered ‘too expensive’.”                                                                                                     Stan Rapp and Tom Collins, The Great Marketing Turnaround

“Customer-intimate companies consider the customer’s lifetime value, not just the profit and loss of a few transactions.”  Michael Treacy and Fred Wiersema, The Discipline of Market Leaders

“Gathering and analyzing your own data on all these effects — acquisition cost, base profit, revenue growth, operating costs, referrals, and price premium — will give you quite an accurate picture of the lifecycle patterns of your customers.”                                                                           Frederick Reichheld, The Loyalty Effect

Steps for correctly calculating Lifetime Value:

Before you begin the development of a lead-generation program, I strongly suggest that you calculate projected Lifetime Value (over a five-year period) for the new customers you plan to acquire.  This way you will know exactly how much you can budget for the acquisition, assimilation, and cultivation of a new customer – and when necessary, the reactivation of lapsed customers.

Let’s assume your goal (which you fully expect to achieve) is to acquire 25 new customers within the next 12 months from a targeted segment of 250 potential customers.

 

Year 1 Year 2 Year 3 Year 4

                   Year 5

New Customers

25 23 20 18 15
Retention Rate 100.00% 90.00% 80.00% 70.00% 60.00%
Revenue per Customer $150,000 $175,000 $200,000 $225,000 $250,000
Total Revenue $3,750,000 $3,937,500 $4,000,000 $3,937,500 $3,750,000
Production and Overhead Percent 83% 83% 83% 83% 83%
Production and Overhead Cost $3,112,500 $3,268,125 $3,320,000 $3,268,125 $3,112,500
Awareness & Acquisition Budget $50,000        
Assimilation Budget $25,000 $15,000      
Cultivation & Retention Budget   $25,000 $20,000 $15,000 $10,000
Customer Reactivation Budget     $7,500 $7,500 $7,500
Total Marketing Costs $75,000 $40,000 $27,500 $22,500 $17,500
Total Costs $3,187,500 $3,308,125 $3,347,500 $3,290,625 $3,130,000
Gross Profits $562,500 $669,375 $680,000 $669,375 $637,500
Discount Rate @ 10% per year 1 1.2000 1.4400 1.7280 2.0736
Net Present Value Profit $562,500 $557,813 $472,222 $387,370 $307,436
Cumulative Net Present Value $562,500 $1,120,313 $1,592,535 $1,979,905 $2,287,341
Projected Lifetime Value $22,500 $44,813 $63,701 $79,196 $91,494
  1. It’s best if you begin by looking back over the past five years, and identifying the customers your company was serving five years ago.
  2. Now, determine how many of these same customers your company has retained each year during the past five years.
  3. Next, calculate the average sales revenues for each of the past five years.
  4. Then, calculate total revenue from these customers for each of the five years by multiplying average sales revenues by the total number of customers.
  5. You can now derive gross profit from these original customers by subtracting total cost for each (including direct costs + commissions) from your annual revenues.
  6. Now look forward.
  7. Your retention rate for each year over the next five years can often be determined by looking at the number of customers your company has lost over the past five years.  Certainly, not a very comfortable situation in this example – losing 40% of the customers within five years.  Hopefully, you’ll improve on customer retention.

In building customer relationships over time, there are only five things you can affect (four of which are shown in red): 1) retention rate; 2) customer referrals (which I haven’t included in this example); 3) increased sales; 4) reduced direct costs; and 5) reduced marketing costs.

Please note in this example that I’ve broken out separate marketing budgets for each of the four probable phases of a customer’s life.  Inasmuch as you’ll employ four separate strategies and supporting tactics for each phase, your Lifetime Value calculation will be more accurate.  I usually show a Referral Budget, too.

8. Now, estimate the average sales revenue the your new customers will generate over the next five years.                                                                                                                                                     9. Multiply average expenditures by the number of new customers retained for each of the five years to determine total revenue for each year.

One reason that I cautioned you on knowing how to correctly calculate Lifetime Value is because over the past few years, I’ve attended two workshops during which the presenters did not include a discount factor.  Yet, the definition of Lifetime Value is this: the net present value of the profit your company will realize on the average new customer during a given number of years, discounted back to present day dollars.  Since profits received from customers come over several years, money received in future years is not worth as much today as money received today.

10.  To do this correctly, estimate average interest rates for each the next five years.  Use the current interest rate and multiply times the risk factor.  Risk is attributable to increasing rate of interest, product obsolescence, competitive pressures, etc.  Use any risk factor you choose; for this example, I’ve used an interest rate of 10% and risk factor of 2 (i.e., 20).  For example, to calculate discount rate for the 4th year (three years from now), use this formula: (1.20)3 = 1.7280

11.  Divide the expected gross revenue for each year by the discount rate for each year to determine Net Present Value Profit.

12.  Add each of the Net Present Value Profits over the five years to derive Cumulative Net Present Value.

13.  Lastly, divide each Net Present Value Profit Value by the number of new customers you have during the first year for each of the five years.

You now have projected Lifetime Value.

After reviewing this example, please let me know if you would like to receive more information on correctly calculating Lifetime Value.  To do so, please send me an e-mail – at earl@hogandirect.com – or by phoning me – at 913-677-4580.  I would welcome the opportunity to serve you.

The Importance of Customer Assimilation

Assimilation pertains to the strategies and supporting tactics of enhancing a buyers’ first-time purchase and post-purchase experience from a company so that a new customers feel compelled to make subsequent purchases and to recommend the company to others. In working with clients, I’ve found that most businesses consider first-time buyers as “active customers”; however, in reality a customer isn’t really a customer until he/she begins making additional purchases after the first one.

The late Bob Stone, a marketing legend, created his Thirty Timeless Direct Marketing Principles.  The second principle was: “The most important order is the second order.  After you have obtained the second order, you have achieved a ‘buying habit’.”

Proof of this became abundantly clear to me while serving the direct marketing needs of a large insurance provider for farmers.  I say that for the following obvious reasons:

Insurance policies carried

Active number of policyholders, Year One Number of policy cancellations Attrition percent Active number of policyholders, Year Three

Persistency Percent

One policy

72,034

29,264 40.6% 34,686

48.2%

Two policies

50,526

9,968 17.7% 37,731

74.7%

Three policies

16,287

1,137 7.0% 13,771

84.5%

Four policies

5,353

231 4.3% 5,122

95.7%

As a long-term policyholder and member of USAA since being commissioned in the Navy 50+ years ago, I can attest to this on a personal basis – beginning only with an automobile policy.  Today, my wife’s car and mine are insured by USAA, our home is insured by USAA, and we carry USAA’s credit cards.

I welcome your questions and/or comments:

Seven advantages of direct mail:

  1. Direct mail provides pinpoint selectivity;
  2. Accurate delivery time of direct mail allows for triggering with other channels for one-two punch impact;
  3. With direct mail you have an unlimited choice of mailing formats;
  4. Singly addressed direct mailings give personal character;
  5. With direct mail, there is no competition for your prospects’ attention;
  6. Direct mail is the most testable medium;
  7. Direct mail has a unique capability to involve recipients.