Yesterday I wrote that your conversion rate is a largely meaningless and irrelevant number on its own…
Conversion rate only makes sense in a bigger context.
If you’re paying $1 per lead, and within the first 24 hours, 5% of your leads convert on a $50 offer, I suddenly know a lot.
I know that I can spend $20 today, and get $50 in revenue.
That makes things interesting.
The 5% on its own didn’t mean much. But with the other numbers, I suddenly know a lot.
Let’s take this even further, with the wisdom of Jay Abraham…
Once upon a time, Tony Robbins interviewed marketing genius Jay Abraham for his Power Talk series.
In that interview, Jay said, “Leads have four critical factors. What they cost is only one… Until you know all four of those factors, you don’t know anything.”
Jay went on to state the four critical factors as…
- Cost per lead
- Conversion rate
- Unit of sale
- Residual value
Now this is interesting. Applying that to my quick example above, we know a few things. We know the cost per lead is $1. We know the conversion rate is 5%. And we know the unit of sale is $50. I didn’t say anything about residual value, at least not yet.
But let’s talk about how that suddenly becomes very important.
Competition almost always drives up the price of a lead…
Back in the good old days of AdWords, you used to be able to get penny clicks and leads for pocket change, even in competitive markets.
Those halcyon days didn’t last long. Competition swarmed in, and advertisers saw their per-click and per-lead prices skyrocket. Funnels and businesses that relied on cheap traffic suddenly were squeezed out by competitors who could afford to pay more.
The same thing has been happening in Facebook. The same thing happens in any new media and advertising opportunity.
When nobody knows what a good bargain advertising is, it’s cheap to show up, cheap to get attention, and cheap to get leads and customers.
Then, word gets out. Somebody publishes a book on the opportunity, competition floods in, and lead costs skyrocket.
Back to our example — let’s say you’re in a competitive market and your lead cost triples…
Suddenly, instead of $1 per lead, you’re paying $3. For the purposes of this illustration, let’s say your conversion rate is still 5%, and your unit of sale is $50.
What does this mean?
Well, suddenly instead of putting $20 into your magical advertising money machine and getting $50 out, you’re putting in $60 for every $50 you get back.
Uh-oh. That means you’re going $10 in the hole for every new customer you acquire.
Of course, the natural thing to do is to try to increase your conversion rate. That’s possible, is definitely a good idea, and could help — at least for a bit.
But there’s something much more powerful that you can do.
And it’s in Jay Abraham’s point #4 above: Residual value.
Here’s how to win bigger when the markets get more competitive…
If you’re just looking at the first three factors, the advertising campaign above has suddenly grown unprofitable — and you’re likely to pull the plug.
But if you understand residual value or lifetime value of those leads, you may change your mind.
Let me illustrate.
So let’s say you’re now paying $3 per lead. You’re still converting 5% in the first 24 hours. And those sales are worth $50.
But let’s throw in another couple variables.
Let’s say you add in a better follow-up and lead nurturing campaign to the 95% of leads that don’t convert within 24 hours.
And in the first 30 days, you convert another 5% — or 10% total within 30 days.
Suddenly every $60 spent is getting you $100 revenue within 30 days. That’s looking good again.
But let’s take this further. Let’s say you have a stack of additional products you can offer.
Let’s say you have another product for $100, and another for $250, and another for $5,000.
And let’s say you offer them sequentially. So once someone buys the $50 product, they get the offer for the $100 product. When they buy that, they get the offer for the $250 product. And after that, they get the offer for the high-end $5,000 product.
For the sake of illustration, I’ll keep the numbers simple. Even with simple math, I had to plug it into a spreadsheet to figure this out.
Let’s say we start with 1,000 customers for the $50 product.
Based on the 30-day, 10% conversion rate, that’s 10,000 leads.
At a rate of $3 per lead, that cost us $30,000 to generate $50,000 in front-end, new customer acquisition sales.
That’s already great.
But we’re looking at residual value, and the impact of the stacked offers I outlined above.
Let’s say that out of the 1,000 customers who bought our $50 product, 50% bought our $100 product. That’s an additional 500 sales and an additional $50,000 in revenue.
Out of the 500 people who bought the $100 offer, 50% of those customers bought our $250 offer. That’s 250 more sales, for $62,500 more revenue.
And out of the 250 customers who bought the $50 offer, the $100 offer, and the $250 offer, 10% of those take us up on the $5,000 high-end offer. Even though that’s just 25 buyers, it adds $125,000 in revenue.
Adding it all up, our initial buyers are not worth $50,000 — they’re actually worth $287,500!
Now let’s work that backwards.
Since 1,000 customers generated $287,500 in revenue, that means each customer’s value is $287.50 — on an initial purchase of $50.
The lead-to-customer conversion rate of 10% means that each lead is worth $28.75.
And remember — we were worried when our per-lead cost jumped from $1 to $3!
That’s the power of understanding residual value. And in fact, this becomes a huge competitive advantage.
Because let’s imagine for a minute that even more competition is coming into the market.
You have two choices. You can keep fighting for $3 leads. Trying to keep your cost of acquisition down.
But you have a TON of margin left, because you understand residual value.
If you know that each lead you bring in is predictably worth $28.75, you don’t have to keep fighting to get $3 leads. While everyone else is duking it out down there, you can choose to go big. You can bid the most of any of your competitors. You can commit $4, $5, $6, even $10 per lead — and still be coming out ahead!
In fact, if you’re willing to spend $10 per lead in a market where everyone else is still spending $3… You’re going to show up bigger and more often, and more and more of the market will come to you.
It becomes a huge competitive advantage. It points all the business in the market in your direction.
And, it sets you up for rapid scale.
Here’s how to really maximize this…
Jay Abraham has classically taught the three ways to grow a business model: Get more customers, spending more money, more often.
I recently released an in-depth breakdown of the lifetime of the customer’s relationship with your business. Instead of Jay’s three steps, I identified 11 distinct areas for optimization and improvement.
The goal is the same. But by going more granular, you have even more opportunities to improve.
In fact, 11% improvement at each of the 11 steps leads to 3X growth. 25% improvement at each step leads to 11X. It’s compounding and exponential.
If the above math made sense, and it motivates you to want to make the residual value of each lead worth more, you’ll want to check out this training.
It’s called The Most Valuable Customer Strategy and you can start watching it immediately when you register at BTMSinsiders.
Yours for bigger breakthroughs,