 What's
a customer really worth?
Imagine
what you would say if your production manager
attempted to justify the purchase of a new piece
of capital equipment by arguing that the lease
payments will bring you in line with industry
benchmarks for capital expenditure!
I’m
guessing that you wouldn’t appreciate the
employment of such irrational thinking to the
purchase of machinery.
However,
I’m also guessing that, on occasion, you might
have been tempted to evaluate your marketing
expenditure by comparing it to industry
benchmarks.
I’m
afraid that this approach to marketing expenditure
is just as irrational. Let me explain why.
A Relationship-centric
business should spend money on marketing for
two reasons (and two reasons only):
1. To
acquire new customer relationships.
2. To
add value to those customer relationships. (You
do this by encouraging customers to spend more
money with you.)
Now,
allow me to ask you two simple questions:
1. Is
it reasonable to expect to see a positive return
on an investment in each of these objectives?
2.
Would such a return be measurable?
I hope
you’re nodding!
The
truth is, the same criteria should be used to
evaluate an investment in marketing and an
investment in your manufacturing plant.
I’m
guessing that you’d evaluate a proposal to
invest in the latter by putting a dollar value on
the benefits of the purchase, and then comparing
this figure with other options.
Specifically,
you’d calculate the net present value
of the benefits the machinery would deliver over
its lifetime, and then compare this figure with
the returns you’d receive from investing the
same capital elsewhere.
This
exact approach is perfectly suited to evaluating
marketing expenditure.
A
customer relationship provides you with an income
stream for a period equal to the life of the
relationship. In other words, it is an annuity.
The
value of this annuity is equal to the total
gross profits earned over its life, discounted for
the cost of capital. (Of course, this is the net
present value calculation.)
Once you
can put a dollar value on a customer relationship,
you can easily calculate your return on marketing
expenditure. And once you can calculate this
return, you can determine your marketing budget by
comparing this department’s return on capital
with that of other departments — and allocating
funds accordingly.
So, next
time a marketing person attempts to use industry
benchmarks to convince you to commit more funds to
marketing, ask them to formulate a new argument
based upon return
on capital.
If he or
she has trouble producing such an argument, you’d
have to wonder about the degree of scientific
method employed in the design and management
of your sales process!
Scary
thought, huh?
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process design Index] [top] |
