The most profitable thing you'll ever do for your business is to understand and ethically exploit the marginal net worth of a client.
Marginal net worth is defined as the:
Total aggregate profit of an average customer over the lifetime of his patronage including residual sales minus all advertising, marketing and fulfilment expenses.
Example:
- New customer brings average profit of $75 on the first sale.
- He repurchases three more times a year, with an average reorder amount of $300 on which you make $150 gross profit.
- With an average patronage of 2 years, every new customer is worth $975. Calculated by: $75 initial profit + (3 additional purchases worth $150) x 2 years of being a customer.
If a customer is worth $975, and it costs you $30 to land him, each $30 you spend is worth $975.
You can now increase your ad budget to land more $30 cost customers.
You could theoretically spend $975 to bring in a customer and still break even!
If you have enough capital you could justify spending 100% of the first sale's profit since every $75 you spend means $900 over the next two years.
Calculating marginal net worth in your business
Step One: Determine certain figures for your own business. If you're new - make a projection.
- What is your 'average' sale? (Add total dollar sales for a year and divide that by the total number of sales transactions you completed or expect to complete.)
- How many times a year does an 'average' customer buy from you? (Take your total number of sales transactions for a year and divide it by the total number of customers.)
- For how many years does an average customer buy from you? (Remember, 20% of the population moves every year, so this is typically less than 5 years, depending upon the nature of your business.)
- How many people does your average customer tell about you? (A major factor.) The most common average is between 3-12, but guess.
- What percentage of these people actually become your customers? (Usually between 20% and 70%.)
Fill in the blanks below (using the numbers you calculated in Step 1, to find out precisely what each customer is actually worth to you right now.
- Average Sale = _____________________
- Number of Sales per year per customer = _____________________
- Number of Years customer buys from you = _____________________
- Number of Referrals from customer = _____________________
- % of Referrals who become customers = _____________________
- Gross Sales per year per customer (A x B) = _____________________
- Gross Sales over life of customer (F x C) = _____________________
- Referrals who become customers (D x E) = _____________________
- Gross Sales from referrals (G x H) = _____________________
- TOTAL VALUE of Satisfied Customer (G + I) = _____________________
Perpetual, Cross and Up Selling
Calculating the marginal net worth is worthless if you don't back end sell to your customers.
A customer can come back on his own accord, or you can actively solicit more business (which is sensible).
Steps to up selling:
Up-sell or resell right at the point of purchase or immediately after the sale.
If you can get them to add on another synergistic product or service immediately, you will dramatically increase your profit. Amazon.com does this extremely well - "Customers who have bought blank, have also bought blank..."
- Experiment with add-on products or services.
- Offer a package deal of related items at a discount if bought immediately.
- Upgrade a sale by cutting $100 off the higher price if they upgrade now.
- Contact the customer right after the purchase to see how they like their choice and offer them a deal on a related product or service. As many as one out of three customers may take you up on it.
- Set up deals with related businesses and take a percentage of the profit.
Perpetual Selling
If you have a consumable or repeat sale product or service set up a monthly, quarterly, semi-annual or annual contact strategy, based on testing.
Let's say you have a product or service that needs to be purchased four times a year. Every quarter you could send out a letter in which you acknowledge their importance as a preferred and valued customer.
Use the letter to inform first, rather than sell. Give them some useful information that would be of interest to them, and make them a preferential offer - a better price or special combination not available to new customers.
Up Selling
This is an easiest sale you're likely to make. Car dealers are masters at it. After you've "bought" the car, you buy bumper guards, headlight protectors... etc., etc.
If you're not quite sure as to how to apply the above, please drop us an email This e-mail address is being protected from spambots. You need JavaScript enabled to view it . we're more than happy give you some pointers.
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