Dan Kennedy has a saying, and it’s that “the business that can spend the most to acquire a customer wins.”
I will admit…when I first heard this from one of my mentors I was pretty discouraged. After all…I was brand new in business. How could I out-spend my competition when I was barely making any money to start with?
Visions came to mind of purchasing big billboards or cable TV ads. I would never be able to afford these things, it seemed. If I can’t afford them…and the person who spends the most wins…then I will never win…right?
The saying requires a bit further explanation, and it has everything to do with the Lifetime Value of one of your customers (LTV).
The lifetime value of a customer (or blog visitor, or subscriber, etc.) is determined, simply, by the following:
Average Ticket Item x Number of Times a Customer Buys per Year x Number of Years a Customer stays with you on average – any overhead expenses.
As an example, a Graphic Designer might have an average ticket price of $300, customers who buy from him twice a year and typically stay with him for 3 years, and let’s say that his overhead expenses are about 20% of his sale.
$300 x 2 = $600 -> $600 x 3 = $1800 -> $1800 – 20% = $1,440
So his lifetime value of an average customer is $1,440. Some will be only $300, some will be $2500. But it will always even out to that $1,440.
Here is the big secret to outspending your competition every time…
Your competition is most likely not even keeping track of their customers’ lifetime value. Even if they are, they are likely only willing to spend a small percentage of that lifetime value to acquire a customer. Maybe $10? Maybe $50? Maybe $500?
The trick is…if your lifetime value is $1,440…you can spend $1,439.99 on each customer in order to acquire them and still make a profit.
Here’s the second secret…you only need to have one client to make this work. Let’s say your lifetime value of a client is $2000. Instead of taking that $2000 and pocketing it, you can do what we call a Profit Rollover which is where you take that $2000 and apply it towards acquiring more customers.
Let’s say that $2,000 that you rolled over into marketing and customer acquisition nets you 4 new clients. Now you have $8,000 that you can roll over. Based on our results from the $2,000 we invested earlier, we know that we will now get 16 new clients from that 8,000 (if you get 4 from 2000, you would get 16 from 8000).
Roll that over and you have quite a bit of cash to invest into growing your business (to be exact, $32,000…when your initial investment was only $2000).
I just began this process in my Web Design business by offering my book for free. I spent an average of $15-20 per client to send them a book for free and reward my referral partners for giving me the leads. The bill is somewhere around $1,600 just to print and send the books — and then there’s the follow up sequences I am doing via snail mail.
But I am totally okay with doing this and spending all of this money, because I know that all I need is one client to make a profit. I know the lifetime value of my clients, and I am willing to spend up to that amount to acquire them.
The cool thing? I have 2 interested prospects already from this process. If both come through, I will have nearly tripled my investment.
UPDATE – Here were the results from that experiment: An Unexpected Surprise: How I Got 25 QUALIFIED Leads Overnight