There’s little arguing that a client’s value can be determined in multiple ways.
Today, I’d like to leave aside discussions of a client’s inherent worth as a human being and the pleasure one derives from helping another person succeed and discuss something far more important to the health of your business.
Most businesses generate a substantial amount of profit from clients who keep repurchasing, again and again — over the months, over the years, over the decades. Very little of that profit would be there if you didn’t bring those clients into your business or practice in the first place.
How much would it be worth to your business if you could bring in an extra 5, 10, 50, or even 100 clients this month and every month? Even if you don’t make a single dime on the initial transaction, but instead you make enormous combined profits on all the repeat transactions you do with them in the future?
How to Turn Prospective Clients into Long-Term Relationships
In his classic book, Getting Everything You Can Out of All You’ve Got, master-marketer Jay Abraham states, “Acquiring clients at a breakeven or a slight loss and making substantial profits on back-end repurchasing is one of the most overlooked and underutilized methods of client generation and growth available to you. But it can’t work for you until you first recognize a very important fact. If your business or practice is one that has a high probability of clients coming back, again and again, to repurchase from you the same or different products or services, you owe it to that business or practice to do everything within your power to get clients into the buying stream as quickly and easily as you possibly can.”
Most businesses make it far too difficult for clients to start a relationship with them. If you lower or totally eliminate the hurdle in starting a relationship, far more people will begin one with you.
If you deliver great value, service, and tangible results, these people will keep coming back and dealing with you. And the fact that you were the only one with enough faith in yourself, your products, or your service to take the risk instead of putting the risk on their shoulders will long be remembered favorably by these clients. The faster you get a buying or advisory relationship started, the faster someone will convert from prospect to lifelong client.
Many companies increase their clients and profits merely by shifting their focus from trying to make profits on the acquisition of a new client to making their real profit on all the repeat purchases that result from those new clients. The classic examples are the book and music clubs. Why would big, astute companies like Columbia House or Book-of-the-Month Club possibly be willing to send you six to twelve CDs or books for a dollar or two initially? Do you think they lose money long-term on those transactions? Or do you think they recognize that for every 10 or every 100 people coming in, a large number will keep buying over and over again at the full rate? They want to do everything possible to make it easy and attractive to get you started buying and using their service in the first place. By doing this they do tens of millions of dollars a year from the people who come in on that break-even proposition.
Similarly, many credit card companies offer a low interest rate for the first six months you have their card and many service companies offer the first thirty days’ of their services for free when you sign up.
Until you identify and understand exactly how much combined profit a client represents to your business for the life of that relationship, you can’t begin to know how much time, effort, and, most importantly, expense you can afford to invest to acquire that client in the first place. You need to know the lifetime value of your clients (what Jay Abraham refers to as your clients’ “marginal net worth”).
Knowing how much a client will spend with you over a period of years tells you how much you can spend on the process of acquiring a client.
The most profitable thing you’ll ever do for your business is to understand and ethically exploit the marginal net worth of a client.
What is the current lifetime value of one of your clients? It’s the total profit of an average client over the lifetime of his or her patronage — including all residual sales — less all advertising, marketing, and incremental product or service-fulfillment expenses.
Let’s say your average new client brings you an average profit of $100 on the first sale. He or she repurchases three more times a year, with an average reorder amount of $300, and on each $300 reorder you make $150 gross profit.
Now, with the average patronage life lasting two years, every new client is worth $1,000.
You could, theoretically, afford to spend up to $1,000 to bring in a client and still break even… And this doesn’t take into account that your efforts to attract one new client will often attract far more than one.
If you haven’t calculated your client’s marginal net worth, here’s Jay Abraham’s formula for doing so:
- Determine your average sale and your profit per sale.
- Compute how much additional profit a client is worth to you by determining how many times he or she comes back.
- Find out precisely what a client costs by dividing the marketing budget by the number of clients it produces.
- Ascertain the cost of a prospect the same way.
- Establish how many sales you get for so many prospects (the percentage of prospects who become clients).
- Calculate the marginal net worth of a client by subtracting the cost to produce (or convert) the client from the profit you expect to earn from the client over the lifetime of his or her patronage.
Same Strategy, Different Approaches
Once you’ve calculated the lifetime value of a client, you have many ways to accomplish your break-even objective.
Remember, the goal isn’t just to cut the price of the first purchase. The goal is to make that first purchase so much more appealing that people find it harder to say “No” than “Yes Please!”
While reducing the price of your product or service is the most common and obvious way to get the first sale, there are other powerful ways to obtain first-time buyers.
For example, you can calculate your allowable marketing or selling cost, which is how much money you’re willing to either spend or forgo receiving (by reducing the selling price), in order to make that very first purchase more appealing to a prospective client.
Let’s say your product or service sells for $200 and your cost is $100. Also assume your average client repurchases several times a year for several years and you will realize a good long-term profit. Obviously you can reduce your price by $100 on the first sale to reach a break-even point and gain a new client. But you could put that $100 to a number of other uses.
You could keep the price at $200 and use the $100 as an extra selling incentive to your salespeople. You could also use that same $100 to buy more of your product or service. So you still charge the full $200, but you give prospects twice the quantity on the first purchase. Or you could take the $100 and use it to buy other complementary products or services (at wholesale) to package and add to your product or service without raising the $200 price — so the value of your offer becomes far greater and thus more attractive. Or you can use that $100 to invest in advertising, sales letters, additional salespeople, free seminars, or any other marketing or selling programs.
The only limitation you have on how to use your allowable marketing or selling cost to help you strategically break even on the initial sale is that it must be ethical and legal. And after testing it out it must be economically viable in the long term.
This strategy, when applied, will make your conventional-thinking, nonstrategic competitors look far more expensive and appear to offer significantly less value. And you will gain visible distinction, attract more clients, and seed significant profits for the future.
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Today’s Action Plan
Using the formula provided above, determine your client’s marginal net worth. Next make a list of every product or service you or your company sells. Then figure out how you can lower the resistance barrier to a prospective client by lowering the entrance fee you ask. Remember, focus attention on the fact that where you begin has nothing to do with where you end up. A new client first coming in for a lower-priced starter offer will turn into a client who buys over and over at full margin.
Try it out in a small, safe test approach first. You’ll be pleasantly surprised by how many people take you up on your proposition. If you use the logical strategy of lowering the barrier of entry to get started in a relationship, it will produce significant business results.
Let me know what you think – please leave a comment down below…