What you’re about to read in this blog post completely contradicts what you’ll hear within main stream circles about marketing and business success. Yet, it shares what the savviest direct response marketing veterans and companies know and do to grow businesses really, really fast.
Let’s Start From The Very Beginning
The smartest direct response marketers divide all marketing into two main categories: front-end and backend.
Front-end marketing is the marketing done to prospects in an attempt to generate new customers. In other words, it’s marketing done to create a first transaction with a prospect.
Backend marketing is the marketing done to existing customers in an attempt to grow lifetime customer value. In other words, it’s the marketing done to create additional transactions beyond the first one.
The savviest marketers understand the sole purpose of front-end marketing is… most often… to generate maximum new customers at break even. Meaning: the purpose of front-end marketing is simply to fully recoup the money you’ve invested into advertising by the acquisition of new customers.
So, for instance, let’s say you sell a product for $100. And, let’s say you invested $1,000 into a media buy. Well, the purpose of the front-end is to recoup that $1,000 investment by getting at least 10 new customers (10 x $100 = $1,000).
At 10 new customers, you would get a complete return on your media buy investment of $1,000. And, in essence, you would acquire 10 new customers at no charge. For free.
Most traditional (non-direct response) advertisers don’t get this. They view all marketing the same… with the purpose of generating a profit on every transaction regardless whether it’s the first, second, third, or fourth. Again, the savvy direct response marketers understand profiting on every transaction is not the purpose. At least, not on the front-end.
Just think of it like this: The front-end is to acquire new customers; the backend is to generate profit.
Make sense?
Good.
Then let’s get into how the REALLY savvy marketers take this to a new level in order to crank up the speed at which they’re able to grow any company.
Here’s what they do: They lose money on every new customer they generate.
That’s right!
They lose money on the front-end on purpose. And by doing so, they grow their backend… hence, their profit… much, much faster than if they were only breaking even on the front-end.
Let me demonstrate this with an example.
Let’s suppose you sell a membership to your club for $100 per month. And let’s say your average customer remains a member for 12 months. That means the average customer is worth $1,200 to your company over the life of their membership (1 year).
If you spend $1,000 on advertising and generate 10 new customers, you break even. If you did this every month, and had zero attrition (just to keep things simple), at the end of the year you would have 120 active members and have generated a gross profit (after marketing costs) of $66,000.00.
Now let’s look at what would happen if you lost money on every new customer.
Let’s say you spend $1,500 on advertising and generate 14 new customers. That brings you back just $1,400. Meaning: it costs you $100 total or $7.14 per new customer. If you did this every month, taking a $100 per month loss on your advertising, and had zero attrition (just to keep things simple), at the end of the year you would have 168 active members and have generated a gross profit (after marketing costs) of $91,200.00.
Let’s say you spend $2,000 on advertising and generate 17 new customers. That brings you back just $1,700. Meaning: it costs you $300 total or $17.65 per new customer. If you did this every month, taking a $300 per month loss on your advertising, and had zero attrition (just to keep things simple), at the end of the year you would have 204 active members and have generated a gross profit (after marketing costs) of $108,600.00.
Breaking even on the front-end equals 120 customers and $66,000 gross profit.
Losing $100 on the front-end equals 168 customers and $91,200 gross profit.
Losing $300 on the front-end equals 204 customers and $108,600 gross profit.
And keep in mind, those numbers don’t even take into account any referrals or backend revenue.
You better believe when it comes to the backend we’d also see a multiplication of the revenue (going from break even to losing $300 a month on our front-end advertising) because we’d have almost 160% more customers to tap into.
As well, when you’re able and willing to go negative (take a loss) on the front-end, you’re able to tap into new sources of customers other companies won’t be able or willing to use.
Some of your biggest sources of new customers will just never allow you to break even on the front-end. They won’t be responsive enough. So average marketers will dump them and move on to finding another source of new customers. While the savviest marketers will continue to use them by going negative (taking a loss) on the front-end.
Here’s The Big Catch (and WARNING!)
In order to be able to do this, you must… MUST… know your marketing metrics. If you don’t know your numbers, there’s no doubt, you’ll lose your shirt in a New York minute.
- First, of course, you need to know your lifetime customer value. How much does the average customer spend with you over the life of their patronage with your company.
- Second, you need to know what is the average number of purchases a new customer makes per year.
- Third, how quickly new customers make the second purchase.
- And, fourth, how much the second purchase is.
With these numbers you can make some accounting adjustments.
Here’s what I mean: In our example above, we know the second purchase happens within 30 days when customers make their second month’s membership payment of $100.
So, in this example, we could use part of that second month’s payment to subsidize the cost of customer acquisition. In other words, it takes us 30 days to get to break even (and beyond) when we get that second month’s payment of $100. At the second payment we’re able to “pay back” the loss we took in acquiring the new customer. And, we go into the black on our profit and loss statement.
The big boys in direct response do this on a regular basis with their media buys and direct mail list rental. You can do the same.
When you find a list or media source that does NOT allow you to break even, but still allows you to generate new customers, allocate part of your first 60 days’ income to the new customer acquisition funnel.
When you intelligently apply this growth method, along with having a rock-solid, tested front-end marketing funnel, your company and income will grow so much faster than everyone else around you. Again, it’s how the big boys do it!
Question: What questions do you have about acquiring new customers? Leave a comment by clicking here.
