Most companies think of advertising as a means of growing sales. That’s all well and good, but prospecting is necessary just to stay in place. To determine your breakeven advertising budget, you must answer two critical questions:
1. What’s your attrition rate? Count all the people who bought from you in 2010. How many of those same people bought again in 2011? The percentage difference is your attrition rate. You need to make up those lost buyers just to stay in place, before any growth can occur.
2. How much does it cost you to acquire a new customer? Using historical data, determine what it costs you on average to acquire a new customer.
Multiply the number of people who have bought from you over the last twelve months times your attrition rate times the average cost to acquire a customer, and there you go: The resulting number is how much need to spend in order to simply stay even with last year.
Too many companies think that they can save money in a down economy by eliminating prospecting. What many don’t realize is how important it is to keep prospecting simply to stay in place. Strong buyer files are the lifeblood of every company, and letting those drop too low can send you into a death spiral from which it’s difficult to recover.
