Ten “Dids” to Examine Your Failed Ads and Make Them Work Next Time

There are some pretty silly statements made about advertising. Many are quite obviously irrational.

“I can’t advertise in July, the circus will be in town.”

“Don’t talk to me about advertising. Your publication carries my competitors ads.”

“I have all of the business I need.”

Some, like “I tried advertising. It doesn’t work,” at first seem to be perfectly logical conclusions. The conviction of the people making this claim is unshakable – most likely because they’re describing exactly what happened to them.

Of course, if they had said, “My kid tried riding a bike, but he fell over. Bicycles don’t work,” or “I tried golf once. I didn’t get a hole in one. Golf is a stupid waste of time,” everyone would recognize the absurdity of the statements.

But every kid, (and every golfer) knows even common activities require some basic skills.

At its basis, advertising is simple.

Incredibly simple. Just deliver to the public your offer to sell something.

The public’s reaction, though, is not as uncomplicated as “I’ll buy” or “I won’t buy.”

Actual responses range from absolutely no interest on the unsuccessful end of the response continuum, to, on the successful end, people pounding on the door because the sign says the store opens at 8:30, and it’s now 8:32.

Why do most ads produce results somewhere between these extremes?

I’ve identified ten factors that could cause your advertising to produce disappointing results.

Causes #1 and #2 involve your offer.

Cause #1: Did anyone want the stuff you had to offer?

Ideally, businesses would identify and research a market, then develop what the customer really wants. In the real world, manufacturers create, and retailers stock things, they believe people will want.

Sometimes, they’re wrong.

When those retailers say to the world, “Hey, come and buy our diamonelle encrusted left-handed can openers,” people don’t say, “I don’t want any, thank you.”

They don’t say anything.

They care so little about the offering, they don’t even notice the ad, and won’t remember ever seeing or hearing it.
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Cause #2: Did you offer what people needed when they were most likely to need it?

Think seasonality. Swimsuits don’t sell well in November. Halloween candy won’t get much attention in April.

Causes #3 – #6 involve the content of your message.

Cause #3: Did your ad snag shoppers attention? Were you able to hold that attention long enough to deliver your offer?

There are three broad categories of advertising communication – entertainment, information, and engagement.

1. Entertaining ads can work, if there’s a direct connection between entertainment and the one thought you’re trying to plant in the minds of shoppers. In far too many ads the entertainment is not relevant to the advertising message.

2. Most ads offer information. Unfortunately, its about the advertiser. Good ads are about the customer. Instead of “We have a huge selection of clean, late model cars to fit any budget,” try “Admit it, you’re going to like the way people look at you when you wear Ajax.”

3. Engagement requires the shopper to pay close attention to, and consciously consider, the content of your advertising. Unless that shopper is ready to purchase, catching her with a marginally different offer won’t elevate your ad to consideration status.

Say the same things your competitors do, and rest assured that most shoppers will ignore you.

But say something salient, something highly meaningful, and watch the difference.
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Cause #4: Did you engage? Did you actually say anything worth remembering?

Too many ads are tedious, dreary, boring, and monotonous. Are yours?

Just because you have a lot to say doesn’t mean your audience will sit still and pay attention.

Nobody gets emotionally involved in a laundry list of brand names, sale items, or the number of collective years of your staff’s experience..

The most you can expect of any ad is to convey one single, compelling idea. Find that one idea, and express it.
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Cause #5: Did your ad persuade? Did you extend an invitation to buy (a call to action)?

Sometimes we notice a highly creative and entertaining ad campaign, only to find out later that the advertiser lost market share while the campaign ran. The “¡Yo quiero Taco Bell!” chihuahua, “Joe Isuzu,” and Old Spice’s “The Man Your Man Could Smell Like” campaigns come to mind. High entertainment value. Precious little persuasion.

Entertainment aside, shoppers are skeptical. No matter how truthful any claim you in your ad, people don’t automatically believe you.

That process which falls between demonstrating your evidence, and leading them to agree with your claim, is persuasion.
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Cause #6: Did your ad complement your image?

People who project different personalities, depending on which group of people they’re associating with, are not trusted. Without trust, you don’t have customers.

Like people, companies have personalities, which are a critical part of their brand. Advertising is an extension of that brand. If it’s loud, insulting, self-centered, annoying, or otherwise offensive, people will assume your business is organized around those qualities.

What is it that people know about you? What is your professional reputation? What is your image among customers? Among non-customers?

Do you have an image?

How do you know?

Causes #7 – #10 involve external factors.

Cause #7: Did you choose the right medium? Did you have the right sized ad?

Think of advertising as your cost to acquire customers.

Costs per exposure, per thousand, or per rating point only matter indirectly. Media efficiency is calculated by dividing the number of dollars invested by the number of new customers you’ve acquired.

Magazines with tiny circulations but active readership may be a great investment. Regional television stations with the highest priced ads in town may also be a great investment.

Until you track the number of new customers each produces, and the average sale of each new customer, you can’t do a meaningful comparison.
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Cause #8: Did you schedule your ads at the optimum frequency?

There are two factors which combine to make media impact. One is the size of the ad (in column inches, or seconds, or pixels), and the other is the number of times shoppers read  / hear / view it.

Exceptionally salient ads may only need one exposure. Most require multiple exposures to the ad before people respond to your offer.

Under normal circumstances you’re going to need to run that ad several times.
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Cause #9: Did you allow enough time for shoppers to need what you sell?

People eat several times a day. They need new tires every year or two. They buy refrigerators and mattresses maybe once per decade. How many of them are in the market for what you sell at any given time?

Ads for short purchase cycle offerings should pay off quickly. The impact of grocery or restaurant ads can be measured in days.

Other products, which have longer purchase cycles require more patience, and more persistence.
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Cause #10: Did you start with a clear goal?

What was it you wanted to happen when you bought that advertising which didn’t work?

Did you expect to see new faces in your store? Additional referrals? Greater market awareness for your company (“getting your name out there”)? Sales increases? Additional goodwill?

If you don’t know what you were attempting to accomplish, how can you be sure your advertising DIDN’T work?
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Advertising works. I suspect we all know that.

A former boss, when told advertising didn’t work, offered to run some free radio ads for the skeptic. He said, “Let me tell you what they’ll say: Free $100 bills at your business.”

No one ever took him up on it.

Maybe yours is one of those companies which has all of the customers it needs. Congratulations. I envy you.

Most every business owner I talk to, however, needs a steady influx of new customers.

Like playing golf or riding a bicycle, there are skills you’ll need to make it work. You weren’t born with the ability to run your own company, but you learned what to do, and when, and why. Likewise, you can develop the ability to profitably advertise that same company.

You’ll need to invest a modest budget, commit to some seriously detailed record keeping, and allocate enough time to develop and hone those skills. Thirty minutes a day for the next year will give you the rough equivalent of one semester of Intro to Marketing.

Fortunately, there’s a lot of great information available, and much of it free. If you’re ready to get started, drop me a note and I’ll send you a recommended reading list.

And take another look at the “Dids.” If you’re ready to start fishing for customers, isn’t time for you to give advertising another shot?

Your Guide,
Chuck McKay

Your Fishing for Customers guide, Chuck McKay, gets people to buy more of what you sell.

Questions about making your company’s advertising “work” may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

If you know someone who would find this article useful, please share it.

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A Marketing Lesson from American Idol

Roughly 20 minutes into the Nashville auditions for American Idol, the Lovely Mrs McKay turned to me and said, "These people MUST know how awful they are." "They don't have a clue," I sighed.

Have you noticed how often incompetent people are supremely confident? Not just auditioning for American Idol, but throughout life?

Professor Justin Kruger and graduate student David Dunning of Cornell University studied this effect in their 1999 paper, Unskilled and Unaware of It. Their conclusion: those who knew the least rated themselves most knowledgeable, and those who actually understood the topic were far less sure of themselves.

This result has been confirmed in multiple follow-up studies involving several skills and fields of expertise. It is known as the Dunning-Kruger effect.

Which begs the question: why does this happen?

Answer: the basic skills and awareness needed for competency are exactly the same skills necessary to evaluate the competency.

Their lack of knowledge (incompetence) prevents them from recognizing their lack of knowledge (incompetence). People don’t know what they don’t know. They don’t even know where to look or how to look at it.

And it doesn’t dawn on them that skilled performers DO know this stuff, until they’re exposed, dramatically to their own ignorance. Until then, they delude their incompetent selves into illusions of confident competency.

If you’ve ever wondered how:

• people who can't articulate the issues, still feel confident casting their vote (or making inflammatory statements);
• how people with no experience teaching, know exactly what's wrong with our education system; and
• how those who have never studied investing, can blithely plow their life savings into the real estate market

Incompetence leads people to make poor choices. Incompetence prevents them from realizing they make poor choices. This is the Dunning-Kruger Effect (DK). On the other end of the DK continuum, competent people tend to rate themselves lower than they should. Their internal voices seem to say, "Hey, everyone knows this."

The dumb get confident; the intelligent get doubtful. And to a greater or lesser degree we're all guilty.

How Biased Feedback Makes it Even Worse

Imagine a typical Friday nite in any typical neighborhood watering hole. The regular crowd shuffles in. One of them, Miss Karaoke Singer, is recognized by the rest as being the "best" in the club.

What kind of feedback does she get?

Do any of the other contestants tell her that her breath control is bad, her vibrato unnatural, or mention the odd affectation she's developed? Hardly. They don't know anything about nuanced performance. Since the only feedback she gets is positive, she thinks she's good.

Good? No, FANTASTIC! The Dunning-Kruger effect helps her to believe she's ready for American Idol!

Then comes the audition.

The judges tell her she's a poor singer. Her own incompetence prevents her from understanding what they're telling her. These judges must be stupid. After all, she just gave a great performance.

She gets angry. Tells off the judges. Not because she's defending herself. Not because she's trying not to look bad in front of her supporters. But because she's completely incapable of understanding just how bad she is.

Advertising That Doesn’t Work Probably Has More to Do With Dunning-Kruger Than Advertising

Much like our karaoke singer, every city has an advertiser who, rather than admit his advertising strategy and execution are flawed, convinces himself that advertising doesn’t work.

Does anyone in Mr. Businessman's entourage tell him his ads have nothing substantive to say? That they don’t speak to the buyer in natural language, and instead just spew out ad clichés like "fast, friendly, service?" Does anyone tell him that putting his kid and his dog in the ad won’t convince anyone to buy things from him?

Or more technically, does anyone tell our businessman that his ads don’t have enough frequency to make an impact? That he’s using the wrong medium? That his competition has effectively co-opted his position?

No. His friends get a kick out of seeing him on TV, or in the paper, or on radio, and the only feedback Mr. Businessman gets is positive. He thinks he's good.

Until he sees his sales figures. Plummeting or flat-lined sales force a confrontation with reality, and it’s the rare businessman indeed who doesn’t address his frustration and anger at advertising medium - or on advertising in general. Hence, the near-ubiquitous refrain of: "I tried advertising and it didn’t work."

Unfortunately for Mr. Businessman, if he doesn’t want to follow Miss Karaoke Singer back to waiting tables, he still needs to get more customers. And fast!

How Small Clients Can Get the Best Ads And Grow to Become Big Companies

The thing about big fish / small pond business owners is, they often believe their success in one field translates to competency in almost everything else. Rather than leveraging the expertise of their ad man, they’ll bully him until they get the kind of ads they want - ads full of Dunning-Kruger-esque
follies.

But sometimes business owners who are genuinely good at what they do manage to overcome the Dunning-Kruger effect. They find a professional to bring to them the same hard-won competency and
expertise they offer to their own customers.

Its much like what happens when a truly talented singer gets on American Idol: with the right direction and promotion, some dreams do come true.

What about you?

Are you an average karaoke singer? Or a true star in search of the right stage and the right spotlight?

Knowing which is critical when you're fishing for customers.

Your Guide,

Chuck McKay

 

Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about finding your spotlight may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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More SEO and PPC. We must save the General!

They called the procedure venesection – puncturing a vein to remove blood from the body. From the time of the ancient Greeks, physicians had prescribed bloodletting as treatment to “balance the body's four humors.”

It was December 14, 1799. General Washington had come down with a sore throat. He called for his estate overseer, Mr. Albin Rawlins and asked for venesection as treatment for his distress. Washington accepted as fact the conventional wisdom that bloodletting was the cure for most physical ailments. After all, he'd seen it cure various maladies of his Negro slaves.

Rawlins estimated that only a small amount of blood need be removed to cure Washington's sore throat, and took half a pint (8 ounces) of Washington's blood.

When the General didn't show signs of improvement, doctors were summoned.

Dr. James Craik was Washington's personal physician. Arriving to to attend the General, and noting the sore throat had not improved, he performed another venesection, this time, 20 ounces.

When the General didn't show improvement, he performed a third venesection, removing another 20 ounces.

Hours passed, and the sore throat persisted. Assuming that Washington's humors were much farther out of balance than he had imagined, Dr. Craik removed 40 more ounces of the General's blood in the forth venesection.

Dr Elisha Dick, a prominent physician from Alexandria arrived, confirmed with Dr. Craik, and took the only reasonable action. He removed another 32 ounces of blood from the General's forearm.

Roughly 90 minutes later, having been drained of 130 ounces (seven units) of whole blood, the Father of His Country lay dead.

The Treatment Isn't Working. We Need More Treatment.

They called the procedure Search Engine Optimization – using choices of specific words to help the pages being “optimized” to rank higher in organic search. From the time of Google's launch, Internet experts have prescribed SEO, and its step-sister, Pay-Per-Click advertising to “increase traffic to your website.”

In January of 2010 Robert Smith developed a software product which standardized a procedure he called “Diversified Thinking.” Robert built a website to make the software accessible, and offered memberships to his site.

Robert's brother-in-law was “getting into SEO.” Like many entry-level business people, Robert accepted the conventional knowledge that “more traffic” is the cure to nearly every marketing problem. After all, he'd seen before and after screenshots of successful SEO'd pages.

Robert's brother-in-law charged only $800 (family discount) for the work necessary to SEO Robert's site. The brother-in-law optimized the pages on Robert's site to rank well for the key phrase “Diversified Thinking.”

Other than the odd, unpredictable response from random visitors to his site, Robert's website wasn't selling memberships. The brother-in-law suggested Robert consult an expert in pay-per-click advertising.

PPC Experts, Ltd. agreed to handle an Adwords campaign for Robert, charging him $2,000 for their service. Robert waited patiently for two weeks, then called PPC Experts and told them he still wasn't selling any memberships to his website.

PPC Experts explained that they had purchased keyword phrases involving the phrase “Diversified Thinking.” They suggested that additional related phrases were likely to change public response. Unfortunately, Robert's retainer had been spent, and they needed another $2,000 to implement those changes. Robert sighed, and wrote the check. Another week went by.

Robert called PPC Experts. They examined the analytics program, and told him the traffic to his website appeared to be increasing. Robert demanded to know when the increased traffic was going to turn into sales. PPC Experts concluded that Robert was poised on the cusp of success. They recommended that he invest another $4,000 in PPC advertising to push past the last market resistance and to protect the investments he'd already made. Robert took a deep breath and gave them his Visa number. PPC Experts charged $4,000 to Robert's account.

Another ten days went by before Robert fired PPC Experts.

He called the head instructor at the local IT School, and asked for their opinion. The professor looked over Robert's site, looked at his PPC campaigns, examined the analytics, and concluded that the original SEO was too narrow. He said it should have included secondary phrasing beyond “Diversified Thinking.” The Professor offered to turn Robert's site into a hands-on experience for his SEO students, and to personally supervise the changes, for only $3,200.

Robert, looking shell shocked, pulled out his MasterCard, and paid the Professor.

On the first of the following month, his savings account and two credit cards having been drained of $13,000, Robert refused to put another dime into his project. His web host shut down his site for non-payment, and his dream of owning a home-based business lay dead.

Conventional, maybe, but not much wisdom.

Robert's experience is common.

Ridiculous example number one: Lars and Sven purchase hay in Kansas at $2.00 per bale. They sell it in Nebraska at $2.00 per bale. When Lars notices that they don't seem to be making any profit, Sven says, “I told you we needed a bigger truck.”

Ridiculous example number two: Mr. Car Dealer throws a party with free hot dogs, free face painting for the kids, and the presence of a radio disc jockey, all of which are designed to get more people to his dealership. If enough of those people buy cars, the event is a success. If not, he concludes the radio station brought the wrong people.

Ridiculous example number three: Web site owners who believe the “secret” to making millions of dollars on the web is to tap into “more traffic,” “increased traffic,” or even better, “unlimited streams of free traffic.” They spend hundreds of dollars on the latest “marketing secret” and are left with nothing to show but fewer dollars in their bank account.

The problem with every one of these examples is pretty obvious. They suffer from the delusion that more of what isn't working will fix their problem. Instead of searching for qualified buyers, they follow the conventional wisdom "more traffic" solution, and purchase more of what isn't working.

Its human nature to want to believe anyone who promises instant results.

For hundreds of years people believed that the cure for nearly every physical ailment was bloodletting. (That belief was so pervasive that people didn't feel the necessity of finding a surgeon** to perform the procedure. Anyone with a sharp instrument could open a vein). In the majority of cases*, venesection did no good, and likely harmed the patient.

In much the same way, convention wisdom calls for additional traffic to solve marketing problems. Sometimes business people get lucky. Most of the time they spend the money and have nothing to show for it.

A technique from direct marketing.

Direct response marketers choose their “lists” carefully. They will invest in prospect lists which are more likely than average to yield customers for what they're selling. They know each list will be consistent.

If mailing to a particular prospect list returns 7 sales per 1,000 offer packages, it will return 70 sales when they mail 10,000 packages. However, direct response marketers NEVER project the sales from list one against list two. Direct marketers are very picky when it comes to lists.

Both retailers and Internet website owners would do better if they followed direct response examples. Your success isn't defined by the number of people who pass through your store, and pass up your offering. Your success depends on your ability to narrow your offer from “more traffic” to qualified buyers.

More of what doesn't work is a sign that there's a serious flaw in your strategy.

Lest anyone think I'm opposed to either SEO or PPC, I use them both. However, I promise that they are tied directly to a plan to attract qualified buyers, and to a reasonable time frame.

One last thought.

Short-term strategies tend to focus on transactional shoppers. Long-term strategies tend to focus on relational shoppers. It only makes sense that it takes longer to build relationships.

So if your marketing professional tells you you need to invest more money and wait patiently, evaluate which shoppers you're trying to attract. If you're targeting transactional shoppers, and not getting response, the cure is never “more traffic.”
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* Side note: In a few isolated cases, there is evidence that bloodletting actually does some good. Hypertension (high blood pressure) is relieved by lowered blood volume. People at risk for cardiovascular disease may have, by virtue of lowered blood volume also lowering system iron content, suffered fewer heart attacks. Lowered iron content may also ward off staph infections. And there is anecdotal evidence that lowered blood pressure may aid in pain management.

** Second side note: the red and white striped barber pole hearkens back to the middle ages – an approximation of bloody bandages to let illiterate townspeople know the barber and his sharp razors were ready to bleed them for a fee.
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Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about attracting qualified buyers may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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Is There Money in Accomodating Early-Stage Shoppers?

You carry a cellular telephone. You're reasonably happy with the service, the rate, even with the quality of your phone calls. Still, the phone you purchased two years ago was already proven technology by those standards, and is now considered old. Plus, you're seeing the ads on TV for the newer touch screen phones, and you're getting curious.

You're vaguely aware that your two year commitment to your current carrier is drawing to a close, and you keep seeing all those ads for the newer touch screens. You head out to the mall. It seems a good idea to quiz a couple of salespeople at the cell phone kiosks.

You've just become an early-stage buyer.

Salespeople have names for early-stage shoppers: "lookie loos," "tire kickers," "time wasters." Early-stage shoppers, very aware of their own ignorance, would feel much more comfortable at this point if salespeople were removed from their buying process. Early-stage shoppers say things like, "I'm just looking."

Shoppers identify themselves by the questions they ask.

• Early-stage shoppers don't know what they don't know. They are are becoming aware of an itch, but don't know yet how (or where) to scratch. Early-stage shoppers tend to ask questions about the process.
  
  Current early-stage questions in the cellular industry are along the lines of "What's Wireless-N," "Are you telling me I can use my phone to connect my laptop?" and "What exactly is a 4G Network?"
  
  
• Whether conscious of it, or not, mid-stage shoppers have eliminated the offers which don't solve their problem, and are honing in on the solution which is exactly right for them. Mid-stage shoppers ask questions about specific equipment and its implementation.
  
  Middle-stage questions sound like, "How good is reception on this phone?" or "What's the battery life on the Model 22XJ?"
  
  
• Late-stage shoppers are ready to buy. If they're talking to you, there's an excellent probability that you'll get the sale. Late-stage shoppers ask questions about pricing and purchase terms.
  
  Late-stage questions might be "What's the total price including the upgraded memory chip and sales tax?" or "Can you give me a better price on the hardware if I accept a longer service commitment?"

Salespeople pray for late-stage shoppers.

To most salespeople, selling will always be a numbers game. "Pitch" the offer to a large number of people and a few will purchase. If those few spend enough money, salespeople are rewarded for all of the time they spent with those who didn't buy.

If you show signs of buying, salespeople will pay close attention to you. Show the opposite signs and they will move on to better prospects. They call this process "qualifying the lead."

But, suppose you're one of those ideal customers the cellular companies lust over. You buy expensive phones which lead to expensive add-on services, you buy the additional warranty, and you never invoke early termination. You're not a tire kicker or a time waster. You're a highly-qualified early-stage buyer who has very real questions about changes in technology and services since you last upgraded.

Wouldn't you be more likely to trust someone who helps you understand the alternatives rather than pushing you to make an immediate purchase? Isn't this the basis of relational selling?

Nurturing shoppers through the stages.

Put yourself into the mindset of an early-stage shopper for anything. If you found a reliable source of information, wouldn't you automatically be more inclined to buy from that source when you've decided to purchase?

So far, the best side-by-side comparison I've seen for cellular service and phones is offered by c/net. The sad part of this analysis is that c/net doesn't sell telephones or cellular service.  Any cell company could publish this information.  It is widely available.

Of course, the danger of inviting side-by-side comparisons between your company and your competitors is the risk of not being competitive. Maybe that's why the cellular providers not only hide this information, they all bundle services differently which makes comparisons even more difficult.

But some businesses understand how to grow new customers.

Distinctive Kitchens Culinary Arts Center in Pensacola, Florida is a family business that for 80 years has sold premium appliances, and more recently wines and culinary accessories. Distinctive Kitchens offers demonstrations, classes, and in-store experts. Shoppers new to gourmet cooking or experienced cooks brushing up on new technique will find the answers they need, and a great source of product, too.

Sweet Maria's Coffee in Oakland, California offers all of the information any coffee drinker could possibly want, from reviews of various equipment, to articles, to instructional videos, to selections of green coffees from all around the world. Plus, Sweet Maria's hosts a community forum in which members discuss their opinions of coffees, roasting, brewing methods, blending, storing, and the selections of green coffees. Care to bet they have very little customer turnover?

Home Depot has a series of in-store workshops designed to give customers hands-on experience using materials, tools, and supplies in their Home Improver Club.

Think about the number of gallons of premium paints, glazes, and other supplies you can sell over the customer's lifetime once you teach a homeowner how to apply a faux painting technique.

Can your business offer early-stage information while competing for late-stage shoppers?

Why not?

• Could your insurance agency create a checklist for homeowners, listing all of the common furnishings, and leaving space for the homeowner to estimate the replacement cost of each?
  
  
• Could your photography store set up “good, better, best” packages of cameras, lenses, flash attachments, and instructional videos?
  
  
• Could your HVAC company produce a chart that shows how quickly a new furnace or air conditioner will pay for its self in savings due to higher efficiency?
  
  
• Could your furniture store create a layout grid with scale pictures of common furnishings and help shoppers envision their home with new sofas, beds, and entertainment centers?
  
  
• Could your music store create posters which explain the advantages of specific guitars in the performance of specific genres of music?

Of course you could. It only takes a little planning, and a little time. When you give early-stage shoppers the basic information they need, those shoppers will come to you now, and are likely to return as they move through the buying stages.

When you give early-stage shoppers the basic information they need, those shoppers will come to you now, and are likely to return as they move through the buying stages.
__________

Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about attracting customers at different buying stages may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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How to Calculate Lifetime Customer Value

In “How to Make Money by Losing Money,” we introduced the concept of back end sales, and suggested it was worth giving away a $400 (retail) cellular telephone in order to get a $100 per month cellular telephone service contract.

How did we know? We simply subtracted the cost of the premium (the front end transaction) from the sum of back end profits over the lifetime of the vendor/customer relationship. In Part 3 we'll learn how to use the Customer Lifetime Value to calculate useful things, like ad budgets.

Our hypothetical telephone company is a small start up. It has 3,500 customers, each locked in to a twenty-four month service agreement. The company's net profit is $297,500 per month.

Over the first year of the contract those 3,500 customers will produce $7,140,000 in profit - approximately $1,020 each.

They will also produce $955 each in the second year. (There will frequently be a difference between year one and year two. More on that in a minute).

This means that even if every single customer stops doing business with this company, the lifetime value (profit) of every new customer this phone company can acquire is still $2,040.

Calculating LCV for your business.

This LCV number is important. Without it we can only guess at how much we are able to spend to acquire a new customer.

A. What is the profit on your average sale? $ _________

B. How many times will the average customer repurchase from you? _________

C. Multiply A by B to estimate your average customer's lifetime value. For your company that value is: $ _________


Lifetime Customer Value = Pt (profit per transaction) x R (number of customer reorders)

Of course, this is overly simplistic.

In the real world, Lifetime Customer Value is a moving target.

Under most conditions, not all of those cellular telephone customers will complete all 24 months of the service agreement. If 14 percent cancel during the first 12 months, 3,200 customers will enter year two of their relationship with the cellular provider.

At the conclusion of the second year we can estimate that, freed from their mandatory minimum service agreement, 70 percent will either upgrade to a new phone with the same company, or sign with a competitor. Either way, they'll be entering into a new 24-month agreement.

But the remaining 30 percent will appreciate the month-to-month nature of their new relationship with their cellular provider. 1,050 will enter year three with the company.

Also, the profit margin actually increases the longer a customer stays a customer, since older customers tend to consume fewer support services.

So, applying a bit more accuracy to our figures, the actual customer lifetime is three years. She'll generate $2,205 in value to the company during that lifetime.

Calculating Customer Reorders for your business.

Your average sale figure is pretty straightforward. Simply divide total revenue by number of transactions. Estimating the number of times a customer will make another purchase is a bit more difficult.

You could divide the number of total sales by the number of customers, but that leaves us with a bit of a problem. Can you spot it? Exactly. Newer customers will not have ordered as many times as a long-term customer would have.

We'll get more accurate data if we remove data from all customers who have not finished their relationship with you. But that means you must already have a good estimate for the length of time a customer is likely to continue to purchase from you. And if we knew that, we wouldn't have to estimate. (Author makes “I'm going crazy” sound of index finger thrumming on lips).

OK. Let's reconsider.

If you've been in business for several years, you can create a fairly accurate estimate by removing from your list of customers any who haven't ordered anything from you in the last 12 months. Now, select every fifth (or seventh, or thirteenth) remaining customer until you've created a significant sample. Fifty may be acceptable. One hundred is much better. The larger the sample, the more accurate your results.

Calculate the number of days between each customer's first order, and their last order with your company.

D. What is the number of days between the first purchase and the last for each customer in your sample? ___________

E. Sum the number of days as customers from each customer sample. The total is: _________

F. Now divide by the number of customers in your sample. ___________.

This is the average length of a customer relationship, in days. If you're a younger company and don't have records going back years, study your sales data. As closely as you can, estimate the length of the average customer relationship, in days.

G. Whether calculated, or estimated, how many days does this work out to be for your company? __________

Trim the database.

From your complete customer database, remove all data back as far back as the number of days in your average customer relationship. Count the number of sales transactions which remain, back to day one. Count the number of customers which remain, back to day one.

H. For your company the number of sales is: __________

I. For your company the number of customers is: __________

Divide the remaining total sales by the remaining number of customers and you'll have a highly accurate customer reorder number.

J. Divide H by I. The average number of reorders for your typical customer is: __________

The final step.

Divide the average profit per sale (from A, above) by the average number of reorders (from G).

K. That number, your true lifetime value of a customer, is: $___________.

You can add a degree of sophistication (and accuracy) by discounting the value of future cash flows. It's a bit complex, but if you're curious, drop me a note.
 ____________

  Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about budgeting with lifetime customer value may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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How to Make Money by Losing Money

Would you buy a dollar for 50 cents?

OK, that one was easy. If you could hand me 50 cents, and get a dollar back every time, you'd push as many fifty cent pieces in my direction as I'd be willing to accept.

What about for 99 cents? Would you be as excited about that exchange?

Maybe. As long as there's a profit to be made you might be willing to make it slowly.

How about $1.35? Could you imagine spending $1.35 to get back one dollar? Your first reaction is likely "no," but the correct answer isn't so obvious.

How could anyone stay in business losing 35 cents on the dollar?

Pretend with me that your music store consistently sells twelve guitars a week, at an average price of $850, and an average profit of $332 (39 percent).

You're planning an Anniversary Week guitar sale, and have budgeted $10,000 for advertising. Knowing that you'll get to keep 39 cents of every dollar you take in, it would seem that to recover your $10,000 advertising investment you'll need to generate $25,641, or roughly 30 additional sales (for a total of 42) just to break even.

But wait a minute. Selling 42 guitars this week doesn't have you showing a profit. You're merely recovering your costs.

And what happens if you don't sell 42 guitars? Wouldn't you have been better off not advertising this sale at all?

Maybe we need to re-think this Anniversary Week sale idea.

Then again...

We probably will sell a lot of accessories. We'll probably draw some new people into the store, and remind former customers that they used to enjoy shopping with us.

OK. Even if we can't sell enough guitars to pay for the Anniversary sale advertising, we might sell enough other items to recover the ad budget.

And then there are the rumors of the way the new competitor does business. You've heard he will happily lose money on the first sale if he gains a new customer in the process. What the... How can anyone stay in business with a silly business model like that?

Well, your competitor has recognized that the customer who buys the guitar will also need a case, maybe a strap. Over the next weeks he'll see the value of a battery-powered tuning standard, or a capo. He'll need picks, and strings. Over his lifetime as a player, he'll need lots of strings.

Then, too, over his lifetime as a player, he may purchase several other instruments, and all of the accessories. Maybe he'll even need lessons.

If a business is willing to invest money in advertising to gain new customers, why not invest in the customer himself?

When we consider the probability of all those additional purchases, and all of the profit derived from them, would you be willing to lose a few bucks on the "front end" of this relationship to "buy" the customer, and gain a profitable "back end?"

Twenty years ago Jay Abraham brought up the concept of back end sales by telling the story of a coin dealer. The dealer offered a $23 starter coin set at cost, and gained 60,000 new customers.

• Within six months, 6,000 of those 60,000 new customers each bought another $1,000 worth of coins.
  
  
• Two months later 2,000 of the 6,000 customers each purchased roughly $4,000 in additional coins.
  
  
• Finally, 500 of the 2,000 bought another $10,000 each.

By being willing to break even on the initial sale, the coin dealer was able to generate a list of qualified customers who were responsible for $19 million dollars in additional sales:

And this part is critical: every one of the 60,000 names on the initial list turned out to be worth $317 in additional sales, even though nine out of ten of those new customers never spent another dime.

This is a great illustration of Lifetime Customer Value (LCV).

Make your profit on the back end.

How many customers would you be willing to sell at no profit, if it meant each would directly or indirectly generate $317 in new sales in the next year?

Would you maybe even be willing to lose money on the front end, if there was enough profit on successive back end deals?

• Would you give away the $400 (retail price) cellular telephone, in order to gain the 24-month usage contract at $100 per month? 
  
• Would you give away the new $60 (retail) chrome plated coffee brewer to gain a customer who spends an average of $234 on your gourmet coffees?
  
• Would you be willing to sell gasoline at an average profit of $14.32 per month (four, 20-gallon tanks), when that driver will spend an average of $31.92 each month in interest and carrying charges on your company credit card?

Yes, I suspect you would.

Next time, in "How to Calculate Lifetime Customer Value," we'll determine in dollars and cents the value of each new customer. We'll also get a handle on how long that new customer will continue to do business with us.
 ____________

  Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about making money with back-end sales may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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Zen and the Art of Persuasion. Part 3 of 3.

There’s a gas station at one of the Interstate 20 off ramps in Columbia, South Carolina that is rumored to have the lowest prices in town. If they don’t have the lowest prices, they certainly have convinced a large group of drivers that they do. Most hours of the day they have a constant line of cars at each of the eight pumps.

A casual observer will notice a young man drifting from car to car, speaking with each driver in sequence. The young man you notice on Monday will not be there on Thursday. Another young man will have taken his place.

And should the observer become an eavesdropper, he’ll hear the young man explain that he works for a glass company “up in Greenville,” has his materials with him, and can repair the dings and chips in the driver’s windshield for between forty and sixty-five dollars. He opines that the motorists insurance will cover it, reimbursing the driver so there will be no “out of pocket” expense.

Apparently, enough people accept his offer that it’s profitable for the young man, or one very much like him. They keep coming back.

Occasionally one of the motorists, wanting to “think it over,” will ask the young man du jour for a business card. He never seems to have one on him. Although he can name the company he works for, he can’t remember it’s phone number. No, he doesn’t carry a cell, so he can’t provide that number either.

In any buyer / prospective seller relationship, there are two basic reasons that people choose not to buy, and the young man carrying the battery-powered drill and pocket epoxy illustrates them vividly.Read more »

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