This “get more customers” math is the secret to dominating your industry

Buying Customers At Break-Even (Or A Loss!)

I was recently brought in by a local firm — not a direct marketing company — to discuss their marketing.

We took a broad look at what they were doing. What they’d tried that worked. What didn’t. And I got the opportunity to weigh in on a lot of it.

One of the things that jumped out at me was a new customer acquisition campaign that they’d run.

Now I’ll tell you up front, they considered this campaign a failure. They weren’t interested in repeating it.

Until — that is — I showed them how the campaign was a solid winner… And how the more they could scale it, the more money they’d be essentially buying at a discount.

In the interest of confidentiality, I’m not going to reveal too many details of their business. However I’ll give you rough numbers that help you get a feel for what was going on in this campaign. And that will carry us through to the lesson of this chapter.

A business services company with high customer value…

First what you need to know is that this company makes a lot of money off each customer. (They earn it, no doubt. But we’re talking revenue and ROI here, so we’ll stick with the discussion of what they make.)

Giving round numbers, let’s say their immediate customer value is $5,000. And their monthly customer value after that — for ongoing services — is $200 per month.

This means that within the first year, each new customer is worth $7,400 in revenue. Within five years, each new customer is worth $17,000 (and the nature of their business is that most customers will stick with them for five years or more).

Further, $5,000 of the total customer value is front-loaded. Meaning they get it right away.

This is also the most expensive part of the service delivery. Let’s say, for example, that out of that revenue, $4,000 is dedicated to the cost of servicing the customer. But starting with month one of the $200 monthly revenue, you’re looking at something like 80% margins. So they’re making $160 over cost of service delivery every month.

That means, in the first year, they have $2,920 in profit margin. $1,000 of that is immediate.

And over the first five years, their profit per customer is $10,600.

With all these numbers in line, let’s look at the new customer acquisition campaign they’d run.

How a failure of a campaign was actually a huge success…

For this campaign, they’d found a targeted list of 1,000 prospects. They created a single direct mail piece that was rather expensive to send — roughly $4 per recipient. So they spent about $4,000 on the campaign.

They had 12 inquiries and 4 new clients come in as a result of this campaign.

That’s a tiny .4% response rate, to what they thought was a targeted list.

And only 4 sales in 1,000!

Of course, they wanted much more. So they’d considered the campaign a failure.

But I walked through the math with them.

They’d spent $4,000 on a campaign that generated 4 new customers at an initial transaction value of $5,000 each. Mind you, after the cost of delivering the service, they only get $1,000 per customer.

And so they’d essentially broken even on the campaign. $4,000 into the marketing campaign, $4,000 out.

If you stop there, it looks like a one-for-one trade, and isn’t worth it.

But then we calculated the value of those four customers over the first year of service. $1,920 in additional profits were to be generated per customer — that’s $7,680 in additional profit as a result of bringing in those 4 new customers.

And over the first five years of the customer relationship, it gets even better. Over their first five years — after you subtract out the break-even marketing expense — those customers will yield profits of $38,400 (or a total of $42,400 if you include the $4,000 profits in the initial transaction).

That’s no longer one-for-one.

That’s $10.60 in profits for every $1 you spend on marketing today!

… From a campaign that was considered a FAILURE because the response rate was too low, and there was no profit in the first transaction!

This leads to the lesson of this chapter.

The more you’re willing to spend to acquire a customer, the bigger breakthroughs you can create in your business.

If you’re able to acquire a customer at break-even — or even go into the hole for the first six months when you get a new customer — you can grow rapidly.

This does require you to have a system in place for creating more customer value beyond the initial transaction. We’ll get into some of those systems in the section on What You’re Selling. But once you have this system in place, you have tremendous power.

Let’s say, for example, that this company is going up against a competitor who — like they used to — insists on making a profit on the first transaction. While they’re willing to break-even.

Let’s say that all the other math is the same, to make it easy.

If this company is willing to spend $1,000 to get a new customer but their competitors are only willing to spend $500, what difference does that make?

How much bigger of a splash can they make with direct mail?

How many more media outlets are at their disposal in terms of advertising affordability?

How many more resources are they able to dedicate to following up with and nurturing leads that come in?

And what impact will that have on their ability to dominate the market?

Now just imagine, that competitor is still only willing to spend $500…

But this company has had a realization… Each new customer is worth $2,920 in the first year, and $10,600 in the first five…

And so — because they’re an established company, with plenty of profits coming from past customers — they decide do spend up to the entire first-year’s profits on getting a new customer.

Instead of being willing to spend double the competitor, they’re now willing to spend almost 6X what the competitor spends.

How easy does it become to be the dominant player in your niche when you’re willing to outspend your competitors by almost 6X on getting new customers? Knowing that even when you do, that within the next few years you’ll be adding multiples of that in profits to your business.

They don’t stand a chance!

This is one of the biggest, most powerful secrets of the world’s greatest direct marketers.

It’s not just psychology, and understanding how to generate a response. It’s understanding the math — knowing the value of a customer, and understanding where the real profit lies. And making full use of that knowledge as you go out to acquire new customers at break-even, or even at a loss in the name of longer-term gains and total industry domination.