“Make your bargain before beginning to plow.” – Arab proverb
Those who frown upon the practice say that if you lowball to get the first contract, you can never charge that client your regular rates — and you have just acquired a highly unprofitable piece of business. But there are two flaws in their thinking.
First, it’s simply not true. Just call your lowball price quotation an “introductory special.” Make it clear that the product or service usually costs more — and will in the future — but that your prospects can get a great deal if they act now.
Second, “buying the business” often turns out to be a smart move — especially when you take into account the “lifetime value” of the customer you are trying to win.
To determine how much they can afford to spend to get a new customer, many marketers base that figure on the average size of the first order. Therefore, if the front-end product or service is $500, they won’t spend anywhere near that to acquire the customer, for fear of operating at breakeven or even at a loss. If they want to double their money on the promotion, the most they’ll spend to make the sale is $250.
But smarter marketers know that the amount of money you can spend to acquire a new customer should be based on the customer’s lifetime value, not just the revenue from the first order. Lifetime value refers to how much money your customer is likely to spend with you during the period he remains a customer of your business.
For instance, if the average unit of sale is $500, the average number of purchases per year is two, and the average customer remains a customer for five years, the lifetime customer value is $500 x 2 x 5 — or $5,000. The business owner who understands lifetime customer value as it relates to customer acquisition has a tremendous advantage: He is willing to spend more to acquire new business, because he knows its true value.
Based on an understanding of this principle, marketing guru Jay Abraham frequently advises clients to give salespeople a 100% commission on the first sale — instead of their regular 10%, 15%, or whatever. The 100% commission gives the salesperson much greater incentive to go out and get new business. And the company gets its usual profit on all the repeat sales.
A company selling books to corporate librarians asked me to devise a marketing campaign to get new corporate accounts to start ordering books from them. I asked the owner what he would be willing to spend to get a new account. He said about $300.
“Forget advertising,” I advised. “Just open up an account for every company you want as a customer — and put $300 in it. Send each prospect a personal letter telling them they already have an account with you — and that it contains $300 that can be used at any time this year.”
So … instead of funding a sales or marketing campaign, my client gave the money he would have spent to generate leads and make sales calls directly to his key prospects so they could try the service at no cost. It worked like a charm!
Online trading services use the same tactic. They send you a letter telling you they have opened an account for you with $75 or so in it. You get the money when you do your first trade.
Need to stimulate business? Calculate lifetime customer value, decide what percentage of that amount you want to spend on acquiring new customers (10% is a common figure), and basically just give potential customers the money in exchange for trying your product or service.
(Ed. Note: Bob Bly is a freelance copywriter and the author of “The Complete Idiot’s Guide to Direct Marketing” (Alpha Books). He can be reached at www.bly.com or via e-mail at firstname.lastname@example.org.)