The Power of One
September 13, 2005 - By John M. Bomarito 

OK boys and girls, it’s story problem time. Don’t worry, this will be an open book test and you may use your calculators. So grab a piece of paper, a number two pencil, the adult beverage of your choice and let’s begin.

The Situation

Fay’s Family Dining has been in business for 18-years. When she first opened, the customers just seemed to show up. She was the only family restaurant on this corner and word of mouth helped to build a steady stream of regular customers. About four years ago, business began to drop. Some of the regulars moved away. Others passed away. New people have moved into the area who do not even know she exists. Competition, especially from chain restaurants grew. Today, Fay typically has about 50% of her booths unoccupied during lunch and about 30% unoccupied during dinner. The breakfast crowd is OK but the dollar volume is down about 10%. What is worse, Fay’s best waitresses are leaving to take jobs at her competition because their tips are down. Fay has had trouble hiring and training competent replacements. This has caused more of her customers to defect because they experienced bad service.

Up to this point, Fay’s strategy had been to “hope that things get better” by the following month.

The Solution

For the first time, Fay has decided to try advertising. She invests $359 in a color direct mail ad that will reach her target audience. Because money is tight, Fay’s only offer on the ad is for a $1.00 off dinner or lunch. The rest of her ad promotes her regular specials and uses photos to show how nice it is inside of her restaurant. She also leverages her family-friendly atmosphere, with graphics & copy.

The Disappointment

After two-weeks, Fay has only had one coupon returned. Her overall business is up about 10% and she is seeing new people in the restaurant, but she does not attribute the activity to the ad. She is so disappointed, that she cancels the agreement for the 7 remaining mailings.

Fay decides that she will never advertise again.

The One New Customer

Nancy and John have resided in the area for seven years. They have driven by Fay’s restaurant thousands of times but never went in. Nancy and John have three kids under the age of ten. They like to go out for dinner, but are worried that their children will cause too much commotion in the restaurant. Fay’s ad appealed to Nancy because it mentioned the children’s menu and it said “We Love Kids” in big bold type. She almost forgot the dollar-off coupon, but every little bit helps when you are on a family budget.

Nancy and John enjoy the experience of eating at Fay’s and they become regular customers. They spend an average of $44 for dinner, which they do twice per month and they typically have breakfast there once a month for $33.

Their routine continues for another five-years, when the family decides to leave the area to pursue job prospects in a different state.

The Quiz

1. Calculate the lifetime value of the customer for Nancy & John?

2. Based on the initial investment, what was the gross profit or loss over the life of the customer?

3. Explain whether this customer acquisition cost was a good or bad investment

Extra Credit

1. What was the opportunity cost? In other words, if Fay had continued to advertise the seven more times she agreed to and she only added one new customer per mailing, who spent the same average amount, what is the forgone dollar amount in sales from not continuing with her campaign?

2. Assuming that Fay offers a $10.00 coupon on her ad, which results in 10 new regular customers spending $45 each per month over the course of a year.
1. What is the annualized gross profit from the initial investment?
2. What is the five-year gross profit projection, if they all remain regular customers spending an average of $45 per month?

Homework Assignment

Calculate the average annual and lifetime values of your customer. If you are new in business or you are lacking on the data, come up with a reasonable estimate based on what you do know.

Keep this figure someplace where you can easily retrieve it, because next month we will explore the differences between customer loyalty and customer satisfaction. You will need these figures to quantify the discussion in next month’s article.

The Reward

The first 18 people who respond with the correct answers to the quiz, will receive the audio CD “Double Your Business in 12 Steps” an interview between Bob Burg & Minesh Baxi, who was recently profiled in a business section article in The Detroit Free Press.

Simply email your answers, together with your name, address, city, state and zip code and business name with a daytime phone number in case there are shipping questions, to: jbomarito@moneymailer.com Put the word QUIZ in the subject line. Offer is valid while supplies last or until October 26, 2005, whichever comes first. You must be 18 or older. Sorry, we cannot ship to addresses outside the United States. Not valid where void or prohibited by law.

John Bomarito has over 20-years of marketing experience and owns Money Mailer of North Macomb. John can be reached at 586-726-0297 or jbomarito@moneymailer.com. You can also visit his web site at www.moneymailer.com/macomb

© 2005 All Rights Reserved. No part of this article may be published without advance written approval. Names and circumstances used in the above article are purely fictional and do not represent any persons living or dead. Any similarities between such are purely coincidental.