Do you know why big businesses spend millions on marketing? The main reason we can predict is to grow their business faster. These companies spend aggressively on marketing. However, it is just half true.
In this article, we will understand a very important concept of marketing. And because of this, giant companies and heavily funded startups spend too much money on marketing.
Do you know?
We all are using Zomato and Swiggy to order food online. Do you know these companies spend thousands of rupees to acquire one consumer?
Amazon and Flipkart are the e-commerce giant in India. Do you know these two companies spend thousands of rupees to acquire one consumer?
There would multinational food outlets in your city. Do you know these outlets spend hundreds of rupees to acquire one consumer?
Everyone knows about the products and services of Microsoft and Google. Do you know why these companies spend millions even when they are world-famous companies?
I asked these question to give you insights for this article.
Why do Big Businesses Spend Millions on Marketing?
According to Bizjournals, Americans see more than 4,000 ads in a single day!
That’s too much!
What that means is companies are spending or we can say investing for marketing and advertising.
In order to understand this, we need to understand a concept.
Lifetime Value of Consumer:
This concept is leveraged by all big businesses and heavily funded startups. And that is why the companies spend millions continuously for a longer period of time.
Let us understand with examples.
We see ads of Domino’s Pizza on television and social media. Considering they are spending 1000 Rs for acquiring a single consumer. This is also called COST OF CLIENT ACQUISITION (COCA).
There are so many people who believe that if they want to eat pizza, they would only prefer Domino’s.
Because of this, Domino’s gets thousands of people who prefer to eat pizza of Domino’s only.
Assuming that a person eats pizza of Domino’s 20 times in a year. Considering the average billing is 300 INR because he would go with his friends also. The total yearly revenue would be 6,000 INR. The total revenue of 10 years, considering the same average billing, that would be 60,000 INR.
60,000 INR revenue will be generated by Domino’s from one consumer.
Now, there are thousands of people in India and even millions of people across the globe prefer to eat pizzas of Domino’s Pizza.
Imagine, how huge amounts of revenue can be generated. The revenue will easily hit in millions of dollars and this amount will definitively beat the amount spend on marketing with a massive margin.
Let us take another example.
Amazon has been spending money on marketing for so many years in India.
The company offers millions of products so that consumers can buy almost each and every product on Amazon.
Considering the name number, the amount spends by Amazon to acquire a single consumer is 1,000 INR.
If you have purchased from Amazon, you must have purchased another time. Because of the service and discounts provided by Amazon, we generally prefer to shop online these days.
Assuming you make on an average 12 purchases in a year from Amazon with an average price of 700 INR. The annual revenue of Amazon would be 8,400 INR.
It is being observed that people have starting shopping online more often. If we make 20 purchases considering the same average price that is 700 INR, the total revenue after 20 years would be 140,000 INR from a single consumer!
Amazon has millions of active buyers.
Another important thing is Amazon Prime. For Amazon, it is currently very much easy to convert regular consumers to Amazon Prime consumers. In this service, the company offers free delivery within 1-2 days, and also we as consumers get Amazon Prime videos.
This is why Amazon has been spending millions on television commercial and digital ads.
In order to gain long term benefits, giant companies and many startups generally spend so much money on marketing.
I hope you understood the concept of LIFETIME VALUE OF CONSUMERS.
Do share with others and share knowledge.