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The peril of averages

I once worked with a business which tried really hard to investigate and record where its new customers came from, so that it could compare the results to the promotional channel spending, to get an idea of what worked best. I’m not going to criticise this, because it put the business ahead of so many others, in effort at least.

Indeed – well done!

However (and there’s usually a however), the business was effectively using an average cost per customer acquisition, and it could have done better.

The key is to look into the value of the customers.

Suppose channel A got 20 customers worth £20,000 at a total cost of £10,000; and channel B got 40 customers worth £40,000 at a total cost of £20,000.

Both channels are providing customers for £500 each which are worth £1,000 each. Are they both equally effective? Not necessarily.

If we look at actual individual values and profitability, we might find that the first channel consistently produces the above, while the second produces a mix of very valuable and minimally valuable customers. The averages might be the same, but the best (and worst) customers are all coming from the second channel.

So if we can just focus on what’s generating those very best customers in the second channel, it might be a much better target.