Find out the life time value of your customers, then you can establish what is a reasonable cost to get them as customers in the first place (we call this the acquisition cost)
For example, if the average customers shops 3 times a year and spends R1000 each time and stays as your customer for 3 years, then you’ll know that each customer's net worth to you is R9000. If you get 10% of that as net profit, then you can, in theory, spend up to R8100 to acquire that customer, safe in the knowledge that you’ve just made a hundred Rands.
So, acquiring clients at breakeven or even at a slight loss is no big deal when you see the life time value of that client.
Here’s how to do it:
1. Compute your average sale and your profit per sale.
2. Compute how much additional profit a client is worth to by determining how many times he or she comes back (a database is great for this, but its easy enough to check receipts).
3. Compute precisely what a client costs by dividing the marketing budget by the number of clients it produces (you are testing how many new clients you get a year aren’t you?)
4. Compute the cost of a prospect in the same way (i.e. cold call, advertising, salesman's time).
5. Compute how many sales you get for so many prospects (the percentage of prospects who become clients).
6. Compute the marginal net worth of a client by subtracting the cost to convert the client from the profit you expect to earn from the client over the life time of his or her patronage.
A service or product sells for R2000. You make R1000 on each initial sale. You could use that R1000 to reduce the price by R1000 and get a new client, or you could use the R1000 in a more creative way to get more clients or extend the benefit to your existing client.
For instance, when I first started coaching I did not charge for my initial consultation because I knew that the value I gave was such that most clients would want to use my services to grow their businesses and so I made all my profits by giving value up front and great ongoing service.
Start with a low price to convert your prospects to customers - then sell on the back end or sell them an upgrade to something more profitable.
For example if you own a garage: "Your first oil change is for FREE." (You will discover other things that need replacing or repairing i.e. air filter, spark plugs etc. and that's where you'll make a profit).
If you own a hairderssing salon: "Your first hair cut at half price." (Do a great job and caringly up-sell them to other products, treatments, etc. and they'll be your customers for life).
You could use the same idea to increase the commission your sales people get for a new client so they have a big incentive to get out there and find new clients.
Or use the money to buy other complementary products to add to the value of yours (e.g. the hairdresser offers vouchers for free massages.)
Or use the extra money to buy advertising, pay more sales people or conduct a direct mail campaign.
Make it your focus to get new clients. Make a list of all the products or services you offer and see how much you could reduce the price of them by and still break even, then utilize the extra money on sales and advertising to find more new clients or entice new clients with special introductory offers.
Remember the life time worth of your client is as important as their initial purchase.