Telstra's new formula for customer acquisiton
Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.
The recent financial results announced by the CEO and CFO of Telstra justified the enormous hole in earnings for the half year as due (in large part) to customer acquisition costs. The cost amounted to some $1 billion. The CFO was reported to have said “You expense it up front and recover it in the following 12-24 months.” Good in theory but is this grounded in reality? Will shareholders believe it?
For sure customer acquisition and lifetime value needs to be reconciled, the idea (as put by the CEO) being that you expense the cost (of acquiring new customers) up front and “recover it in the following 12-24 months”.
It’s a revealing discussion. First of all digital entrepreneurs tend to think about profit margins in a cash costing perspective. In other words you measure what it costs to deliver your product or service and you recover the cost and an adequate margin by pricing it in such as way as it shows a profit in the current period. That can be detrimental where the end price is not competitive
Customer acquisition and lifetime value needs to be reconciled. In other words, it’s not about the next sale to a customer; rather a customer has (or should have) a lifetime value. That’s the amount of revenue you’ll generate from one customer over the lifetime of your engagement with them minus your costs to acquire them and then service them over time.
Let’s say you’re a mobile phone service provider and you know that the average customer spends $100 a month on your service. Over the course of 12 months, you generate $1,200 from the typical customer. But that customer doesn’t stay with you for just 12 months, they stay with you for 3.5 years. The revenue you generate from them over the time that they remain your customer is $4,200 ($100/month x 12 months x 3.5 years).
There is a cost to service that customer each year for the time they remain your customer. Assume that each year this amounts to $30per month. The cost to service them over the span of time as your customer is $1,260 ($30/month x 12 months x 3.5 years).
In the most simple calculation, this would represent a customer lifetime value of the revenue generated by that customer over the 3.5 (or the average lifetime of a customer) years = $4,200 minus the cost to serve that customer over the 3.5 years = $2,940. If the cost of acquiring the customer is say 10% of customer lifetime value, you might spend close to $294 in marketing costs to gain a new customer.
This is a good, basic formula for understanding the metrics of marketing ROI. Perhaps Telstra could also re-assess the cost of how bad service can erode customer value – which must be of concern to shareholders.