If you’ve ever looked at a fitness operator dominate location after location, or a nutrition brand swamp a new market almost overnight, it might be because they got lucky. Or it might be because they know their numbers.
Companies obsess over building their brands, and rightly so. A strong brand means greater exposure, higher conversion rates, more referrals and increased customer value, but brand development is a long game and in isolation doesn’t always translate into sales.
Thankfully, there is another way.
The greatest marketers of all time, regardless of sector, have understood the value of direct response marketing. After all, the job of marketing is to sell. As David Ogilvy, the godfather of advertising said half a century ago, “Nobody should be allowed to create general advertising until they have served their apprenticeship in direct response.”
So what do we mean by direct response marketing? Put simply, we mean advertising that is measured solely in its ability to drive sales. We are not interested in broader engagement, reach or other brand considerations, as valuable as we know they are in the long term. All we are concerned with is the pounds and pence – how much did we spend and how much did we make?
If the answer is that we made more money (in profit terms of course, not revenue) than we spent, then we have a viable and scalable route to market. If not, then we know we should pause that channel, at least until we’ve found a way to either reduce the cost per acquisition or grow lifetime customer value.
Let’s illustrate with an example
Imagine a gym sells membership for £12.99. If their average retention period is 18 months then the average customer lifetime value is £233.82 (12.99 x 18) minus direct costs, which for a budget gym are minimal. Let’s call it £20 for admin. In other words, the customer lifetime profit value is £213.82.
But there’s more – customers are given a code to use when referring members, and it turns out that, on average, members have a referral rate of 0.3. In other words, for every ten members that join, they will collectively refer another 3 members. Therefore, the real customer lifetime profit value is £277.97 (213.82 x 1.3).
The final number we need to consider is the conversion rate. This gym generates most of its new business via free trials. People can sign up for a one-time free entrance to the gym via the website using their credit card details, and then afterwards they can either cancel at no charge or become a member. Data from the membership system shows that 50% of those that sign up for a free trial go on to become paying members.
In other words, the value of someone signing up for a trial is 50% of the customer lifetime profit value, so £138.96.
So what does that actually mean from a marketing perspective? If we’re taking a pure brand-led approach, the answer is not a lot. But if we’re working with a direct response mindset, this insight is pure gold. Because now we know we can spend up to £138.96 generating a lead, but not a penny more.
This is how brands dominate markets overnight. Because they know their numbers and attack the relevant channels as aggressively as possible whilst remaining within that max CPA (cost per acquisition) figure. They don’t care which channels; unlike brand activity direct response marketing is fundamentally channel agnostic. All they care about is the numbers. As long as the CPA is lower than £138.96 then happy days. The faster they can spend the money the better. If that is achieved by Facebook, great. But if it’s achieved by affiliate marketing, email purchasing (which we can now only really do for B2B campaigns due to GDPR), or handing out leaflets, that’s all good, too.
Typically the brand would identify the 3 or 4 channels most likely to be relevant (based in market research + channel experience + instinct) and run a test budget on each. At the end of which, they will have a CPA figure for each channel, and whichever is lowest will receive the bulk of the budget until it increases (through diminishing returns) to the starting CPA of the next most efficient channel, at which point the budget is then split, and so on…
But we’re yet to get to the exciting part…
Imagine that the marketing director for this gym takes a look at the customer data and notices that 80% of their customers are comprised of two main audiences. The first is students, who view the gym as a commodity and cancel their membership every time a new one opens with a cheaper offer. They stay an average of 6 months with a 0.1 referral rate. The value of this audience is £85.73, or £65.73 after the £20 admin costs. The value of the free trials are therefore just £32.87.
The second is females in their 30s and 40s who attend regular classes with their friends and show considerable loyalty to the brand. This audience, on average, stays with the gym for 3 years and has a referral rate of 1 (in other words, they each bring on one extra member from the same audience). The value of these members is therefore £935.28 12.99 x 36 months x 2), minus the £20 for administration, so the lifetime profit value is £915.28, making the value of a free trial £457.64.
In other words, a customer from the second audience is worth over twelve times one from the first audience!
By the time the Marketing Director has finished this calculation, she’s grinning from ear to ear. She now knows that if she refocuses her efforts on the second audience, she can more than triple her CPA and remain profitable. Suddenly every channel has become far more scalable!
Meanwhile, her competitors watch in amazement. How are the growing so quickly? Where is all their money coming from? Then they return to their desks and create a new offer for the local students.
This model applies to every industry on the planet, B2C and B2B. So whether you’re an operator, nutrition brand, equipment manufacturer or consultant, make sure you know your numbers.