One of my mentors, Bill Glazer always says he “makes a sale to get a customer”. Most businesses look at it the other way around. They think, “I need to get a customer to make a sale”.
If your business is one where people return to you time and time again, your objective should be like Bill’s. Your focus should be on how to get a new customer and not on the profits from the first sale. Profit will come later when they continue to purchase from you.
Here are a couple real life examples.
Two that easily come to mind because I did it a few times myself are CD and book clubs. For only $1 you get 10 CDs or 4 books. That is an irresistible offer to a music or book lover, an easy way to get a new customer. So what if you have to buy 4 more books or CDs over the next three years. You would probably do that anyway.
Initially, the cost to Columbia House or Book-of-the-Month club is at a loss. But they know they will recoup that and more because they know your lifetime value.
So how can you make this work for your business? What can you do to make it easier and faster to get new customers?
First off, you need to determine the lifetime value of a customer. To figure this out, take the average sales revenue a customer brings on an annual or monthly basis whichever works for your business. Then determine how long on average your customers stay with you. For instance, say you sell supplements. The average first sale is $30 and the customer then spends $50 per month and stays with you for 6 months. Their lifetime value then is $330.
Now, determine what the cost (product, marketing, overhead, etc.) is on the $330. Let’s say the cost of sales is $100. That leaves you with $230 in profit.
Based on this scenario, you could easily give away the first purchase of $30 to get that customer because you know they will spend an additional $300 leaving you with a profit of $200.
Think of how many more customers you would be able to get using this offer versus the amount you would get with no offer at all. If you are able to get twice as many customers this way, you would increase your revenue by over 40%. Columbia House and Book-of-the-Month club probably wouldn’t have existed without this method.
Although the above example is basic and there would be most likely a bit more involved in computing your customer lifetime value, the point is to know what this number is and then to determine what you are willing to spend to get a customer.
There are more ways to do this then just giving away the product or service and we will talk about some of those next week.