“Leads have four critical factors. What they cost is only one...Until you know all four of those factors, you don’t know anything.”
That’s Jay Abraham talking to Tony Robbins in a vintage “Powertalk” interview I just re-listened to courtesy of the Tony Robbins Podcast (TonyRobbins.com/podcast). Abraham is a famous executive coach, author, and consultant “known for his work in developing strategies for direct response marketing in the 1970s,” according to Wikipedia. Listening to his interview, I was reminded that we DR professionals possess unique and powerful knowledge. The “four factors” are a great case in point. According to Abraham, they are:
- Cost per lead
- Conversion rate
- Unit of sale
- Residual value
This will seem like basic information to most of the people reading this post, but there is really nothing basic about it. In the field recently, I was reminded of that fact.
We had just landed a new client who had been in direct sales for 40 years, but they were new to DRTV. We assumed we were speaking the same language when we set our allowable for their first TV test. They gave us their cost-per-lead target, and we did not question it or ask them to step us through how they had arrived at that number. Big mistake.
At first, everything went great. The work was exciting because we knew that if this campaign succeeded, we would be creating an entirely new business model for the client and the client’s entire industry. We carefully planned the test and helped them select the absolute best production company for the job. The creative team, in turn, did not disappoint: They delivered the perfect commercial. Next, we all held our breath and waited for the results to come in…
Finally, the results came back: We beat our target! Everyone was elated. Backs were slapped. Champagne corks were popped. The future looked bright. And then came the bad news that our client wasn’t happy.
We were caught off guard. Elation turned to deflation as we learned the reason why. It turned out the client had no real basis for their allowable and, in fact, no idea how to calculate one. We scrambled to educate them, but it was too late. They had decided to switch to a more familiar but completely unrealistic metric that violated the design of our entire program. We tried to talk them out of it, but they insisted. We then wasted too much time and money trying to fit that square peg into a round hole. In the end, the campaign failed and everyone was disappointed and frustrated.
The best that can be said is it was a learning experience. I mulled it over for days and came up with a set of questions I now intend to ask every DR dilettante we take on as a client. Perhaps a few people reading this post can also benefit from these questions, so here they are:
What percent of prospects do you think will become a new customer?
What is the average new customer worth each time he/she buys?
How many times will he/she buy from you each year?
How many years will he/she stay with you?
Using the language of the four factors, the answer to No. 1 is the conversion rate, the answer to No. 2 is the unit of sale, and multiplying the answers to 2-4 will give you the customer’s lifetime value. The residual value would be that amount less the initial sale.
How might these numbers help a novice DR marketer? Well, they should start by deciding what portion of lifetime value they’d be willing to spend on acquiring a customer. For example, let’s say a client’s average new customer spends $25 each time she buys, she buys four times per year and her ‘stick rate’ (i.e., answer to No. 4) is two years. The customer’s total value is $200. Now let’s say the client is willing to spend $50 to acquire that customer. All we need to do is multiply $50 by the estimated conversion rate, say 20 percent, and we have our allowable: $10 per lead.
Simplified further, the client can afford to pay $50 for five leads because one of those leads will convert to a customer worth $200 over the next two years. That’s right: In one short meeting with a few simple math problems, tens of thousands of dollars can be saved and millions made. Now that’s powerful knowledge!
Photo by gubgib/FreeDigitalPhotos.net
Jordan Pine is a consultant specializing in short-form DRTV and the author of The SciMark Report (scimark.blogspot.com), a popular industry blog. His field reports are based on actual conversations with top executives from our industry, many of whom are his clients, partners, or vendors.