GAP gives away 40,000 blue jeans on Facebook deals. Does this make sense?

Examining the true cost and value of customer acquisition

The world has just changed again, when GAP gives away free blue jeans just to get more exposure one has to re-evaluate the marketing concept and compare that to traditional marketing methods and cost of customer acquisition.

Since I really don’t know what the blue jeans cost Gap, their cost of distribution and the life value of a GAP customer, I will analyze the restaurant industry instead.

Let’s say you own a newly established brand name franchise restaurant. Now you need to establish a full client base of loyal customers who will give you 10 years of customer value.

Assumptions:

• Average meal = $10
• Average customer patronage = twice a week = 100 times per year

10 year customer life value:

2 x $10 purchases per week = $1,000 per year = $10,000 customer life value

Do discount coupons make sense as a valid marketing tool to increase the loyal customer base?

So let’s print out $50 worth of discounts on a full-color double-sided 17 x 13 sheet. Your best price on 50,000 flyers could be one dollar a piece. If your franchise is printing say 1 million flyers at once then perhaps you can get it down to $.50 each.

Scenario number one: bulk priced franchise flyers

Cost of flyers
50,000 flyers delivered for $26,000
1000 coupons are now redeemed

Cost of discounts:
1000 coupons redeemed at $6 discount equals $6000
250 actual unique customers

Initial costs: $32,000 divided by 250 equals $128 per customer

Client Retention

Let’s say one-third of the new customers become regular long-term customers generating two purchases per week.

New Customer Cost= $384 (the real cost of acquisition per newly established long-term customer)

ROI  Analysis:

You could break even within 5 years if you had an approximate 7% profit margin.

Discussions:

One problem with a heavy discount marketing campaign is that your marketing will attract many customers who are discount driven. In today’s economy customer loyalty is dramatically lower as consumers are looking for best value. So when your competitor does offer a 50% off discount, even some of your previously loyal customers will cross the street.

Scenario number two:  independently produced flyers

At $1 per flyer your costs are increased to $57,000 a year and your customer acquisition is $684.  Remember to factor in that you are not paying the monthly franchise fee.

Actual real world long term customer acquisitions

This will vary greatly depending on the service offering the built in needs and the total service package. For example if Starbucks or McDonalds set up an outlet in a high demand area the conversion could be even higher. But if the product or offerings are hum drum,  the customer may only come back twice a year or not at all and the conversion rates will tank.

For this review we accepted a 30%  conversion rate to long term customers. Well the reality is that I would be surprised if in most cases we achieved more than a 5% conversion rate; meaning the true cost of acquisition would be x 600% of the costs above.

Summary

 

A discount marketing campaign can certainly make sense to help build out your client base but in reviewing the true costs one should consider other marketing options.

Future discussions

A loyalty card program; a 3% rebate in order to create customer loyalty.
A charity sponsorship program; a 3% rebate in order to create customer loyalty.
Higher customer service to protect your customer base.
Permission marketing programs with event reminders.