Infographic Of The Day: What's The Value Of A New Customer?

These handy-dandy equations give you a ballpark estimate of how much to spend on acquiring a new customer. But they don't tell you how to spend that money -- and that's where things get interesting.

You know and I know that an MBA is a bullshit degree, but nonetheless, you can learn a few things in business school. You can also skip business school, and learn them via a very handy infographic. Take this one by Kiss Metrics, on the subject of calculating a customer’s lifetime value.

The basic idea is to take an average check, figure out how often the customer will come back, and how long the customer will continue to be one. But these can be crunched in slightly different ways that yield quite different results, as you see at the bottom:

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Obviously, this is a very loosey-goosey concept -- hey, they teach this in B-school, so it has to be! -- but the basic exercise is important in figuring out how much you should be spending to acquire each and every customer. But as the final part of the graphic lays out, not every customer is created equal -- attracting someone that’s a relatively premium high-roller can make all the difference. And even more surprisingly, just increasing your customer satisfaction by 5% can increase profits by as much as 95%:

All of this is fascinating stuff, and it leads you down the path toward the complicated decisions that business managers wrangle with every day. How do you measure your marketing effectiveness? What forms of marketing are most reliable in bringing in new customers?

But you know what? I’m calling bullshit on this. The marketing arms of many companies are very often their most free-spending divisions. And they’re free-spending simply because of calculations like the one above. But let’s think about this: Just because the value of a customer over her entire lifetime is huge doesn’t actually imply that the best way to attract repeat customers is through marketing.

Is it really so ridiculous to think that a better way of attracting customers is to shave your marketing budget and pool all your money into making a better product? I can think of a few brands that do this quite well. One great example is Kiehl’s, the no-frills beauty products and grooming company. Another is the Five Guys burger chain, which is expanding across the country like Kudzu. Both of these companies barely do any marketing at all. But you know what? Both of their products are great, and that’s all the marketing they need. It’s really a shame that more companies in more industries don’t think like that.

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25 Comments

  • Nick

    So it sounds like an MBA program could be improved or replaced by product development and/or design training. Is that about right? Profound.  Everything else in the <500 words above doesn't really add much.

    The line "pool all your money into making a better product" is lazy and silly of course, but what would be nice is analysis that shows how better product development impacts retention. There is a limit to how much to invest in design, right? Not all well-designed and beloved products are raging successes, are they?

    As I said before, this article and borrowed infographic don't move this discussion forward, other than a few pot shots. Why be divisive? To get more page views? What new point is being made here? That LTV models don't help pad the design/development budget?

    Then again, this is a blog I didn't pay a cent to read, so I guess I got what I I didn't pay for.

  • adeleberenstein

    Cliff, Thanks for bringing forward this infographic.

    The question is what to do with the information. One approach is to examine the process of acquisition to ensure you are not spending too much.  Another would be to take some of the cost and improve the design of the product , as you suggest. Still another would be to invest in customer retention as a small increase in customer retention has such a significant impact on profitability.

    I come from the customer satisfaction industry so naturally I favor that topic but I think a wise management organization would look at its strengths and weaknesses and decide where to put its focus based on its situation.

    Thanks again for raising the topic and bringing forward the infographic for discussion.

     

  • Guy Letts

    If we take off our corporate hats and put on our customer hats, do we spend our paycheck at companies who do great marketing based on the formidable logic in the Infographic, or do we spend it at companies who deliver great products, great service and whose people make us feel special (and who may just happen to do great marketing too)?

    I guess we're all different, but I'm pretty sure it's not an even split.

    I'm with Cliff.

    For those still reading, you may ponder other research that you need only invest one sixth as much to retain a customer as to acquire a replacement.  But I'm biased towards customer retention software because that's the company I've founded, based on my experience (running a profit centre in a large corporate) that it's far easier and cheaper to grow when you're retaining customers than when you're losing them.

  • Shimon Shmueli

    Cliff, OK, let's put the MBA bullshit statement aside. It seems like you think your background qualifies you to make it and you are the editor after all,  and that statement I guess represents the Co.Design approach. As a reader of Fast Company from the day it published its first issue I will continue to read it as I enjoy most of the contributions, yours as well.
    The distinction between adverting and marketing is not a fine one, but it is grossly huge (or hugely gross). Design is just as much about marketing as it is about engineering. A successful product is a result of an intentional (most of the time, but sometime lucky, intuitive, capricious,..) balanced investments in all of these activities, adverting included. Now the question is how you measure success, and my stand is that success is what management considers success and not your opinion or mine. Then you will find many successful products that are resulted from heavy investments in adverting and almost no investments in product development... however, to put things in perspective, I would say that the often in "That ad dollars would often be better spent on product development" should be "most of the time".

    So you see? Perhaps we are not too far from each other in our approaches, that is other than when we bullshit.

  • Cliff Kuang

    Hey all---I typically decline to rise to the ad hominem attacks such as those that fill the comments, but you guys are all guessing about my background, so here's this: Before taking up journalism, which I never studied, I worked as a management consultant at one of the fancy blue-chip firms populated by the country's brightest MBA's. I mostly analyzed company-wide marketing and product development initiatives, in service to private equity deals -- that is, I looked at how effective both those departments were, on behalf of billion dollar funds looking to deals on the order of $350-$500 million. So I speak as someone for whom journalism has never been a first point of reference--and as someone who purposefully stepped off the feeder path to an expensive MBA.

    Aside from a few technical courses, most of the MBA's I worked with--and my co-workers who went on to get MBA's--would happily tell you that the degree wasn't worth it because of the vast knowledge gained but rather the credential it conferred. And these are people that went to Stanford, Harvard, Penn, INSEAD.

    We can all get into the fine distinctions between marketing and advertising, which I appreciate, but I stand by my main point: That ad dollars would often be better spent on product development. And that's the POV this site will always advocate, since we advocate for the power of design.

    In any event, thanks for reading, and thanks for commenting. I'm sure a few of you will turn this comment into another tirade against me, and that's your right. Have fun.

  • Ben Little

    Cliff, this is not the first time your writing has caught my attention.  I remember when you said that raw data usage trends implied iPhone users were smarter than Android users; among other gems since then.

    Starting off with a statement likely to offend most of your audience may be a tactic of some sort (it certainly gets comments; such as this) but you detract so much from your content.  It is like mixing politics or religion into an otherwise inoffensive and interesting storyline.  I'll tell you that you only encourage me to link to your sources when I like them and otherwise utterly avoid you.  You make me not want to read Fast Company (and in fact you have prompted me to read on this site less.)If you're willing to take my advice when it is couched in such a negative comment; I would tell you to spend more effort on good thinking and less on making controversial statements.  You find good stuff that tends to speak for itself, but you sometimes surround it with writing that obscures the value more than adds to it.  I would just take more care in separating your attitude from actual journalistic content; unless you truly are arrogant enough to think that such a sweeping statement is even semi-objectively true (I've heard arrogant people dismiss entire disciplines, including journalism and design; or even dismiss all of academe together thinking that their way of learning and thinking is the true way.)

    I also disagree with your simplistic statements at the end; but I've spent too much time on this article already.

  • Shimon Shmueli

    Guest, you are exactly right. In my original response to Cliff when I said, "I bet there was good marketing thinking done", I was referring to the (crucial) role of marketing in identifying opportunities to match between company's capabilities, brand, etc, and market opportunities and customer needs, wants, etc.

  • Guest

    It is a misnomer that companies like Keils and Five Guys do very little marketing.  What do very little of is advertising.  Product development, packaging, etc are marketing functions.  Just because they don't buys TV / Radio spots or pages in a Newspaper or Magazine doesn't mean they spend very little on marketing.

  • Nick

    Part of what is funny/notable here is that the author is doing exactly what he seems to be protesting: marketing of products without any real value.

    Calling out MBAs and LTV (and ooh look, cursewords!) got him some views and comments. But there is isn't much original thought here, every point he makes has been made over and over and over for a decade at least.

    Maybe I'm a sucker for responding. Suckers fall for marketing of poor products.

  • Greg

    I agree with Shimon, Cliff Kuang actually comes across as a slightly business oriented math nerd that wasn't quite smart enough to gain acceptance to an MBA school. An MBA, my friends is more than learning finance, graphs and the like. Its about the experience, the connection/relationship making process. It is creating a schema of how all business, personnel, social and political sectors fit together.
    It's about the big picture.
    To that end, anyone who would publish contrarily defined viewpoints on educational attainment has illustrated perfectly how little they in fact know. I hold an MBA, and an M.Ed and yet, not ever have I professed that any education is to be considered as B.S. Finally, I would ask of Cliff, did you create the graphs, figure out the equations/formulae to derive the answers contained therein? I doubt it......

  • Trish Johnson

    Cliff, I like it. I'm currently writing a Relationship Marketing paper for a MBA assignment. I would add the 80/20 Pareto rule in defining which customers to keep and which not to keep. What do you think?

  • michael balistreri

    Rate of Discount equation is meaningless/non sequitur- so then the results.

  • Jason Canapp

    Cliff, not sure you meant to do this but it reads like you consider product design to be a separate activity from marketing.  I'd call BS on that. Product design is arguably one of the most important aspects of marketing.  It is a necessary but not sufficient piece of the puzzle.  Ditto for experience design, branding/messaging, etc.

  • Tiger

    The subject matter is interesting, but this infographic sucks. Don't use wavy lines to visualize a discrete set.

  • RABernardini

    Whoa there pardner.

    This is a terrific infographic as it brings cold dry formulae to the visual cortex to make a powerful impression, but 'bullshit degree"?

    Where do you think the need for metrics and the formulae that provide the answers come from?  Life drawing classes?  Not a chance.

    I'll be the first to say that the human mind is crimped, folded and stuffed into a skull for visual processing, but my BFA AND MBA say this is perfectly fine example of  'design' thinking that enhances business requirements.

  • Shimon

    Cliff, in about 450 words, some infographics, the editor pulpit, and a couple of examples, you probably managed to successfully bullshit some readers to believe that MBA is a bullshit degree and we are better off with no marketing at all. Are you speaking from experience? Have you ever been involved in the development of a new product or brand? Can you define marketing in a paragraph? Much of marketing (and much of what is taught in MBA program) is not science or engineering, and human behaviors are difficult to predict and quantify. However, there is substantial evidence that lack of good marketing is a top reason for product failures in the marketplace. So you need to separate between good marketing and bad marketing, and between the marketing discipline/thinking and the people who practice it. Some of the best marketeres never studied marketing, many never went to school, and even in the examples that you bring up I bet there was good marketing thinking done, but perhaps not by "marketing". By the way, is it true that only a fraction of journalism grads become excellent journalists and a larger percentage of great journalists never studied journalism? I don't know. I actually think that much of the material taught in journalizm schools would make for great background to marketing people, perhaps even more so than what is taught in marketing programs.