Buying a customer
by Dr Greg Chapman
Have you ever seen those promotions where they offer you a widescreen Plasma TV, ‘Valued at $2000’, if you changed phone companies? How could you refuse such an offer? Still, being suspicious, you check their rates, and they don’t seem to be that different from anyone else’s – maybe not the cheapest, perhaps around the middle of the pack.
What’s the catch? Are they crazy?
No, they are not. It is that they have done their sums and have determined they can afford to give you a Plasma TV if you sign a contract with them. Like a magician cutting a lady in half, once you look behind the curtain, the answer is rather mundane.
What they are doing is spending their marketing budget on you rather than on the media, and they have calculated the Lifetime Value of their customers. They are buying your business.
When a customer buys from you, you have a reasonable idea how much you make from each sale, but what is the customer worth? Let’s look at how the phone company can afford to give away a Plasma TV screen to each new customer. They will probably ask you to sign a two year contract, but that is probably not enough to pay for a Plasma TV. However, they know, on average, customers stay with them an extra 3 years after the contract expires. (Some may drop out as soon as the contract ends, while others never leave.)
They also have a referral program, and they know, on average, each customer refers two others to them during their time as a customer. Why wouldn’t you want to tell your friends about your free Plasma TV, especially if you get one month free when you do? (Some will not refer anyone, while others will take full advantage of the referral program and refer lots of people.)
So let’s now look at the numbers:
Average Sales Value x $80 / month
Purchases per year = 12
Annual Value x $960
Years as a customer = 5
Lifetime Sales Value $4800 +
No. Referrals during Lifetime= 2
Referrals Value = $9600 (No. referrals x Lifetime Sales Value)
Total Lifetime Sales Value $14,400 x (Lifetime Sales + Referrals Value)
Gross Profit Margin = 20%
Total Lifetime Value= $2880
Wow, you say, I didn’t know that I was worth so much, but still, to give away a Plasma TV? Value $2000. That doesn’t leave much profit left.
But the Plasma TV won’t have cost them that much. Firstly, do you think it is a top of the range premium brand? Do you think it’s the latest model? No, it will be a brand you never heard of, or a model which has been discontinued with stock the manufacturer wants to get rid of. And of course the phone company (if it’s a phone company, rather than a marketing company), has bought all these unwanted Plasma TVs in bulk. It may have cost them less than a hundred dollars each. Does it all look economic now? Do you think they are crazy now?
When you understand the Lifetime Value of Your customers, you can afford to be generous with them. With this strategy, your marketing budget is spent on your customers when a sale is made, not given to a media mogul who takes your money whether you make a sale or not.
What is the lifetime vale of your customers? What are the true incremental costs of your products and services. (In a restaurant, the cost of the food is a fraction of the menu price. Staff have to be paid whether there are customers or not.)
How much can you afford to pay to buy new customers for your business?
May Your Business Be – As You Plan It!
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