Recently I was reading a book on trading. It fascinates me… Mostly because I need something in my life that I can endlessly talk about that means nothing, Football statistics, tactics and strategy is my poison of choice, it works in social situations. If it wasn’t football it probably would have been the stock market.
(It’s no coincidence that I run my fantasy football teams as ‘Buffet/Graham style’ value investing exercises.)
I don’t know if you’ve ever watched finance and investing shows on TV but they are remarkably similar to sports opinion and analysis shows. A bunch of people sitting around a desk talking about things that is in reality largely irrelevant to the outcomes.
If these people held the secret to getting rich in the stock market you’d all be rich already – watch the investing show and follow the advice (It doesn’t work that by the way – they mostly recommend losers). If the sports guys know so damn much about football why wouldn’t they coach a team and win 10 consecutive premierships?
Anyway, tangents aside, while I was reading this book I realised that customer retention has a lot in common with investing. You are making an investment now in hope of a future return (the next sale, a referral, etc). So a lot of the same maths and psychology is involved. (Isn’t marketing, maths and psychology?)
Which means when you invest in a customer relationship you need to balance 3 things:
The amount you invest in order to get a future return. If you have a retail store selling cup cakes then your next purchase is probably only going to be a couple of dollars – which means the amount you can sensibly invest to get a future return is low. Would spending $25 on a newsletter for each customer make sense? I doubt it. Compare that with someone selling industrial components to a manufacturer. They can invest a lot more and still see a return.
The odds of the future return occurring. What are the odds of you closing another sale with them? The higher you stack those odds in your favour the faster you get richer. Say it is 50% at the moment and you only need it to get to 52% to cover the cost of a newsletter. Then it warrants taking the risk. If you need a newsletter to double your sales then I wouldn’t get too excited about those sorts of odds.
The size of the future return. Basically, the bigger the next purchase the less the odds can be and you will still win. Let’s say if you invest $20 in each customer and that every 25th customer buys a second time. Now let’s say that when they buy the second time you make $1000 profit.
That means that you have a licence to print money. For every $500 you spend on customer retention you make $1000 profit. Coincidentally, that is the formula that a lot of the most successful traders use. They aren’t ‘right’ very often but when they are it pays off in spades.
That is also the story behind why there are a lot of failures on the way to success. Few really big winners.