You may have read a post here early last month that talked about when it makes sense to give your product away. In that post we were explaining the value of getting your message or product out to the masses of prospects who might value your core product or service.

And, in my previous post  I wrote about a couple of ways to boost the lifetime value (LTV) of your customers.  To refresh your memory, the LTV of a customer is defined as the total gross profit that you accumulate from a customer over their lifetime (based on the definition of lifetime you pick as noted above), less the original customer-acquisition cost and the subsequent marketing expenses over their lifetime. 

Both of those posts are central to my message today.  You may have heard us mention the value of acquiring a new customer at a loss.  This seems counter-intuitive, but it plays right into the psychology of marketing, and it leverages the LTV of your future customer. 

It is a basic fact in marketing that your current customers will be more likely to make an additional purchase from you than the likelihood of a purchase from a prospect.  I’ll give you an example from world of catalog marketing where, one of the measures of marketing campaigns is revenue per thousand catalogs mailed (Rev/M).  Using a generalized example, when a cataloger mails their “Christmas Wish Books” to prospects and to existing customers the difference is dramatic: 

Rev/M of catalogs mailed to current customers is $5,000/M catalogs mailed while Rev/M coming from catalogs mailed to prospects is $1,250/M.

While this is a hypothetical example, it reflects the real world in marketing.  This factor of four in performance of customers as compared with prospects is something that we see in every corner of business, and in any industry.

Our hypothetical example reflects two interesting behaviors that you should learn about and leverage in your business:

In catalog marketing, revenue is a combination of how many people respond to an offer, and the average order resulting from that response.  What our hypothetical catalog marketer is seeing is that they get a higher response to their catalog from existing customers, compared to prospects. 

That’s the psychological aspect of marketing that you need to master – customers who have had a good experience with you and your products/service are likely to want to continue their relationship with you.  This is what loyalty will bring to you.  You should harvest that “loyalty effect” in every way you can to get more sales from your existing customers (one of the three pillars common to grow your business). 

You’ll find that your happy customers will continue buying from you as long as you don’t disappoint them and continue to provide a top notch customer experience.

The second component of our hypothetical example is that, as mentioned earlier, one of the components of revenue in catalog marketing is the average order.  Not only do we see a higher response rate in catalog marketing, but existing customers also spend more in their subsequent purchases. 

That behavior also reflects the “loyalty effect” mentioned above.  Once you have provided a great experience for a new customer, they will be more willing to spend again, and spend more on these subsequent purchases.  Psychologically, we humans tend to want a little taste before we take that next big bite.  And this is what we see if we track customer behavior over time. 

So, getting back to the original point of this post…why would we want to acquire a new customer at a loss?  It is all about LTV.  While we might add a new customer at a loss, we will more than benefit from reaping this relationship over the upcoming years.  When you develop that “loyalty effect” and invest in your first-time customer, you’ll gain a strong customer for life.  While in the long run the accumulative average LTV of all of your customers might decrease because their acquisition cost was higher, you will end up with more money in the bank.

I worked with a nationally known fund-raiser who had an annual donor program that brought in $30 million.  They were very successful even though they were adamant that they would not acquire a new donor at a loss (where the amount of the donation was less than the cost invested in acquiring that donor).  I convinced them to create a small test to track a group of new donors who were acquired at a loss of $100 each.  They tracked this group over a period of two years and found that this group generated more than five times the donations than a similar number of prospects over the same period of time.  And, when they rolled out acquiring their new donors “at a loss” they were, after a two-year period, able to increase their annual donor program to $50 million.

I did the same test for a cataloger, who had very similar results.  Once they began to acquire their customers “at a loss,” their revenues grew substantially.  In fact, in their case, when we combined that strategy with the strategy I mentioned in my last post to more actively send offers to existing customers, they increased their annual revenues by a factor of four. 

These two examples were simple:  Acquire a new customer at a loss in order to leverage the fact that their LTV will easily offset the investment. 

LTV can seem a dull, uninspiring component of marketing. But understanding the LTV of your customers is crucial to your deciding how much money you will spend in your marketing efforts. And establishing strategies that will enhance the LTV of your customers will make an enormous difference to your business as you continue to grow and set yourself apart from your competitors.

Spend a little time exploring what the LTV of your customers is today.  And begin to experiment in ways to improve the LTV of your current customers.  It will make a huge difference in growing your business.  Then do a little testing to see what the impact of acquiring a customer at a loss might mean for your business. 

As I said earlier, it is a little counterintuitive; but doing this can make a huge difference in growing your business.