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How to avoid spending too much on your marketing

By Jim Connolly

In today’s retail marketing article, I’m going to share one of the secrets behind the biggest, most successful retailers. 

I’m going to share how they know what to spend on advertising or promotion. If you have ever wondered whether you’re spending too much or too little promoting your retail business, here’s what you need to know.

Customer Lifetime Value

In order to attract new customers, in a way that’s highly profitable for your business, you need to know what the average customer is worth to you. Moreover, you need to know the average lifetime value of your customers.

Why?

Because once you know your customer Lifetime Value, (sometimes abbreviated to LTV), you know the maximum amount to invest in acquiring them.

Example

Starbucks spend millions on advertising. They can do this, with great confidence, because they know what the average customer is worth to them.

Avinash Kaushik did some research, which shows the LTV of a Starbucks customer. Here’s an abridged version of what he did:

  • He looked at the average amount that customers spent on a visit to Starbucks. They spent $5.90 per visit.
  • He then looked at the number of visits per week the average Starbucks customer made. They visited 4.2 times a week.
  • This told him that the average customer value, per week, was $24.30.
  • He found that the average Starbucks customer lifespan is 20 years.
  • He then factored in the Starbucks profit margin, which was 21%.   
    • Other factors were taken into account, including things like projected interest rates for the next 20 years, customer retention rates, etc.

The end result was that the average Starbucks customer is worth over $14000 in total. That’s hard to imagine, if you focus on the short-term picture. However, by knowing that the LTV of a Starbucks customer is $14000 Starbucks can make informed decisions about what they are prepared to spend to acquire a new customer.

In closing

What I wanted to do here, was show you the basics of how to estimate the true value of an average customer. Obviously, your business model will be different from Starbucks, with totally different numbers. However, the basics are the same. 

Thinking about the bigger picture, helps you make better decisions regarding what to spend on the marketing of your business. Without taking a longer-term look at the dollar value of a customer, it’s easy to spend too much or too little on acquiring new customers.

This is a huge subject and I recommend you spend some time researching it in more detail.

Finally, I hope you found this useful. Remember to check out all the other free retail marketing resources we have available for you here on the CTS Wholesale website.

To find out how CTS Wholesale can help your retail business, simply click here.