The True Value of a New Customer

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When's the last time you sold your media and you got the credit for bringing in a new customer to the retailer's business? As a matter of fact, when was the last time you calculated what that new customer is worth to the business? Many readers of this column now use the "return on investment" worksheet with their clients. The logical extension of the ROI calculation is to determine the time value of a new client to that business.

Case study:
Recently, I made a call on a central Oregon propane dealer, who sells propane by the gallon. The average annual consumption of propane yearly by a customer is 900 gallons. If the dealer has locked in the rate of $1.46 per gallon for the next 12 months, it would make sense that the annual worth of a new customer is $1,314, right? Wrong.

Let's take a look at a typical ROI and see how it would apply to the propane dealer:

1. The company's annual investment in the station is $20,000.The business is highly seasonal, so most of that $20,000 is invested during the slower part of the business cycle - interestingly, September through March.

2. Seven months at 70 percent of budget is $14,000, or $2,000 per month. Since the busiest time for the dealer is April through August, the remaining 30 percent of the budget will be used during these five months ($1,200 per month) - with only a maintenance campaign during July (their peak time of business). It just doesn't make sense to heavily advertise when they have a backlog of work.

3. A 20-percent ROI (a reasonable figure) would produce $4,000, equaling a net annual return of $24,000.

4. Divide this by the propane company's 45-percent profit margin, and you get a gross return of $53,333 (on the initial $20,000).

5. Divide this figure by the average sale of $1,314 (we'll use the one-year figure for now, and then compare) and you will see that you need to produce 40 new customers per year, or 3.38 per month.

6. Considering a closing ratio of 60 percent, the campaign needs to generate 73 new leads (rounded off).

Now let's use the calculation to see what a new client is really worth, and then refigure, using a true calculation. 
- Average yearly worth of new client: $1,314
- Average retention of new client: 5 years
- Average percentage of business coming from referrals from new clients: 30 percent
- $1,314 x 5 years = $6,570;multiply this times .30 (referrals) and you get $1,971.
- Add this ($1,971 + $6,570) and you get $8,541, which is the real value of a new customer for the propane dealer.

Next, let's use that figure in the ROI calculation. Substitute $8,541 in Step 5 (gross return divided by average sale) and you get 6.2 new customers that must be generated annually (instead of 40) - or an average of one new customer every other month.

One reason we get the lame excuse that your media "doesn't work" is that we don't define realistic expectations before we run a schedule. For the above example, we will run a long-term fixed position (sponsorship) and brand equity campaign with the right message targeting a 35-plus homeowner. Can we generate six new customers over 12 months? You bet! Everything over six is gravy, and you should get the credit for it.

The propane dealer also has a sheet of paper for people to indicate how they heard about the company when they call in for propane. Radio is at the top of this page, above Yellow Pages or any other medium, because if you are positioned first, you have a better chance of getting the credit for the phone lead!