One of my mentors and a brilliant marketer, Bill Glazer always says he “makes a sale to get a customer”. Most businesses though 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 that demonstrate what I am referring to.
Two, that easily come to mind are music and book clubs. For only $1 you get 10 CDs or 4 books. That is an irresistible offer to any music or book lover and an easy way for the company to get a new customer. 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 have determined your lifetime value. They know over the course of the year commitment, you will spend X amount of dollars with them. This “future bank” figure is well worth it for them to give away the first sale to get you to become their customer.
So how do you figure out your lifetime value of your customer? The example I am going to give is basic and may easily be adapted to your business or it may not. Given the complexity of your product or service offering, you may have to segment your customers and determine several different lifetime values. But, hopefully this illustration will give you an understanding of how to determine this.
To start, take the average sales revenue a customer brings on an annual or monthly basis whichever works for the transaction activity in 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. In fact, you could essentially spend $230 to get that customer, for that is your break even. You didn’t make a profit but you didn’t lose any money either.
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, as I said previously, the above example is basic and there would most likely be 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, not a sale.