- How much can you afford to spend, and
- How much are you willing to spend to attract new business?
You may find that you can, and are willing to spend five or six times what your competitors spend. And if they’re not willing to keep up with you, your business may just explode and leave them in the dust.
Just knowing what your margins are, and that you could, if you had to, spend up to that $2,000 amount and still break even, gives you a tremendous edge over your competition.
Here’s a real-life example: My wife and I have a favorite restaurant we like to go to about twice a month. And our meals typically come to about $30. So $30 times 24 meals adds up to $720 in gross sales for the year.
Let’s suppose that we continue to patronize that restaurant for, say, 10 years. That’s our buying lifetime with that particular restaurant. That gives the restaurant a total of $7,200 in sales.
If over that 10-year period, we refer 10 people, 5 of whom become regular customers (and that’s not very many in 10 years), who have spending patters similar to ours, they’ll spend an additional $36,000. (That’s 5 people, times $7,200 a year.)
Add that to the $7,200 that we spent, and we’ve been responsible for generating $43,200 for that restaurant. Even after deducting expenses for overhead, salaries and food costs, the restaurant still realizes a pretty substantial number of profit dollars from the efforts of just one couple.
Now, here’s a question: Could that restaurant afford to give away a free meal to attract a new customer? Keep in mind that two of us are spending $30, so one meal costs $15, and out of that, about a third of it (or, maybe $5) is profit.
So, the meal really only costs the restaurant $10 for the two meals, and only part of that $10 goes to cover the cost of the food.
The rest of the expense is in overhead, which would have to be paid whether or not a meal was served.
The answer is yes, they can afford to give away a free meal. Not only that, but they can afford to do a number of other things to not only attract new customers, but more important, make their existing customers feel more appreciated and more special. And you know, when someone feels noticed and important, appreciated and special, it’s just natural that they’ll want to return.
Let’s imagine, for a minute, that you are a long-time, faithful customer of a certain restaurant. And you brought your family, your clients or your business associates with you to eat there on a regular basis.
How would you feel, if sometime, the manager of the restaurant were to offer you and your party a free dessert as a special appreciation gift for your loyalty and for the extra business you brought them? Do you think that little display of appreciation would cause you to want to return again? I think it’s pretty safe to say that it probably would.
And what about the people who were with you? How do you think they would feel? Do you think they would want to go back to that restaurant? Sure they would. What do you think the restaurant’s hard costs of those desserts would be? Do you think the restaurant would lose any money on that gesture?
Well, it’s not likely. You see, once you know how much profit your customers are worth to you, long term, then, and only then, can you determine how much you can afford to give away, or to spend, to get new customers, or to keep your existing customers coming back. And you can begin to experiment with different offers to see which ones work best.
Now, here’s another thought. Let’s say that the owner of that restaurant runs an ad, or does a mailing to attract new customers.
And let’s say he spends $1,000 for the ad or the mailing, and two couples come in for dinner, and each spend $30.
Well, he’s taken in a total of $60. But the ad costs were $1,000. So what does he do? What would his competition do?
Does he consider the ad or mail campaign a loser...a total bust...and stop running it? That’s what most business people do.
But what about you? What would you do? Well, if you understand the concept of Lifetime Profit Value and Marginal Net Worth, you’ll probably think differently.
When you consider the Lifetime Value of those customers and realize that with the proper care and attention those customers could be responsible for $43,200 each, or $86,400 for the tow of them, it changes the picture.
Of course, those numbers are gross revenue figures, and you have to deduct for expenses. And it’s over a 10-year period. But, still, that represents a significant amount of money. And all from a $1,000 ad. An ad that most business owners would have given up on.
Now, I’m not saying that you have to settle for, and be happy with low response rates for your ads. Certainly, you don’t. You should always try to improve your ads, your letters, your offers… and give good, compelling reasons and benefits for someone to do business with you.
That’s an entire subject, itself, and one we don’t have time to discuss in great detail here. But one we take very seriously, and spend considerable time on in our workshops and coaching programs.
Let’s go back and think about our restaurant example for a minute. Did this idea of stopping an ad just because it didn’t break even, or produce a profit for you sound unusual? Different? Strange? Well, maybe to some people, in some businesses.
But, supermarkets and department stores use their own adaptation of this technique all the time. You’ve probably heard it referred to as a “loss leader.”
What they do is advertise a few products at, or below cost to bring new customers in to their store, knowing that the customer will usually buy more products once they’re in the store.
And also, knowing that unless they get someone to visit their store in the first place, they could never stand a chance of making additional or repeat sales, or getting referrals from them. And additional and repeat sales to existing customers are generally easier to make, and usually always bring higher profit margins.
Just remember this important point:
The first sale means nothing… unless you’re planning on going out of business next week. You’ve go to consider the Lifetime Profit Value… what your customer is worth to you, if you really want to be success.
Now, what about you, in your business? How can you apply this concept of Lifetime Profit Value?
Well, the first thing you can do is determine what the amount of your average income per sale is. The Lifetime Profit Value Calculator below is provided for you to use in calculating the Lifetime Profit Value of your own customers. Fill out with your current figures to get an idea of how much your customers are worth to you.
The calculator below is provided so you can calculate what kind of a difference it will make to your business if you increased each of the areas by 10 percent.
Keep in mind as you do these calculations, that this is a very simplified calculation. In our consulting sessions we get very detailed and take into consideration many more areas. So the results you’ll see in actuality will be dramatically increased. But for a simple and easy to demonstrate way to determine your customers’ value to you, these basic calculators will do quite nicely.
Contact Jim Hogle at info@usccra.com or call 727-480-3400 to find out how you can be the “credit expert” and
attend our free, weekly webinars.
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