… A powerful story about what it means to really know your customer
Marketing guru Jay Abraham likes to relate a story that perfectly illustrates the need to understand the cost of customer acquisition and lifetime value.
Jay met the manufacturer of a century-old mail-order arthritis medicine, a goopy balm “for relieving pains such as arthritis, backache, muscle strains, sprains, and cramps.” The product sold for $3 but cost the producer only 48 cents to make, package, and ship to a customer. Through careful study of the market, the manufacturer calculated that for every nine pain sufferers that tried the product, three would re-order the balm at least six times a year, at an average order size of $10, for life!
Now, here is the fascinating part. The producer was willing to pay anyone $3.45 for every $3.00 jar sold to a new customer. If we do the calculation, this means that the cost of selling to a new customer was the 45-cent loss on the price of a jar and the 48 cents for manufacturing and fulfillment, for a total of 93 cents.
Over the years, the company was able to get more than one million people to try the product, of which one-third became repeat buyers. This produced over $20 million in annual sales for an overall “one-time investment” of $930,000.
… 1/3 would turn into CUSTOMERS for LIFE.
With this knowledge of the customer, Jay then went to all of the media outlets (print radio, TV, etc.) and signed over 1,000 separate agreements to run “per inquiry” spots in their remnant (unsold) space. The advertising payment terms were that for every new mail-order customer that resulted from an inquiry, the media outlet would receive $3.00 for the jar and an extra 45 cents. (The manufacturer only paid for the CERTAINTY of an order.) The campaign was an enormous success, with the manufacturer receiving thousands of orders every day, all with the KNOWLEDGE that 1/3 would turn into CUSTOMERS for LIFE.
The company grew so successful that it was eventually sold to a large pharmaceutical firm for multi-millions.
This story is about the creation of a trial purchase. Your marketing efforts will produce better results by making it as easy as possible for as many (qualified) prospects to try your product. However, THE POWER lies in understanding what the calculations of conversion ratios and lifetime value mean.
Let’s do a series of calculations based on the following assumptions:
- It costs the company $3.45 to get one person to try the product
- 1/3 of the people who try the product buy an average of $60/year for life. (let’s cap this to 7 years)
- The Resulting Gross Profit or Lifetime Value of each Customer is $352.35
The power in this calculation is this simple realization.
The power in this calculation is this simple realization. If you KNOW that your conversion ratio is 33.33%, and you KNOW that your Gross Profit over Period / Lifetime Value is $352.35, you can spend $117.45 with EACH PROSPECT in the trial and STILL BREAK EVEN with the customers you manage to convert!! [the full calculation is below]
It sheds a new light on your marketing budget, doesn’t it?
What’s your customer’s lifetime value?
Appendix: Calculations and Analysis
photo credit: irum
