My general business and internet marketing posts.
Determining Your Lifetime Gross Profit
Posted 10th December 2008 at 09:18 AM by Michael Forey
Tags internet marketing, profit
All entrepreneurs, whether offline or on need to know this key number to run a profitable business. We online marketers have elaborate tracking for conversion rates, click through rates, etc, but we do not track the lifetime gross profit of a customr. Even a company just starting out should have some idea of this number, otherwise how do you determine the price of your product.
The first step as a new business, you should research industry data, ask others to find how long the average customer usually stays with them and the amount they spend per year. If you find from other experienced marketers that on average a person stays with them for five years and spends $100 a year. They will spend a total of $500 over the lifetime of the customer. Next you have to know your costs involved in each product, for example: advertising spending, production costs, etc. Then subtract the cost from the lifetime income from your customer. This will give you your gross profit.
The second step is to determine a reasonable profit. In our example above lets say you have costs of $100 ($500-$100=$400 per client). You now need to determine what profit you want to make. Continuing our example you want to make $350, which is 75% of the selling cost. Now we deduct this from the $400 income per client which equals $50.
This means we could loose $50 to acquire a customer and still have a 75% profit. This $50 is your allowable acquisition cost. This information gives you a significant advantage over your competitors. Now you can advertise and sell your first product at a discount, to get the customer into your funnel and still make on average $350 from them over the next five years.
Discounting isn’t the only way to bring in new customers, but it is the most common. Now that you know your allowable acquisition cost, you can try all sorts of discounts without much risk.
Now rater than focusing on increasing conversion or click through rates, your focus is on how you can increase the lifetime value of each customer. Keep in mind this is two fold;
you can keep them buying from you for longer periods of time or spending more per year.
For more articles like this visit my blog AchieveItMarketing.com - Internet Marketing Blog
The first step as a new business, you should research industry data, ask others to find how long the average customer usually stays with them and the amount they spend per year. If you find from other experienced marketers that on average a person stays with them for five years and spends $100 a year. They will spend a total of $500 over the lifetime of the customer. Next you have to know your costs involved in each product, for example: advertising spending, production costs, etc. Then subtract the cost from the lifetime income from your customer. This will give you your gross profit.
The second step is to determine a reasonable profit. In our example above lets say you have costs of $100 ($500-$100=$400 per client). You now need to determine what profit you want to make. Continuing our example you want to make $350, which is 75% of the selling cost. Now we deduct this from the $400 income per client which equals $50.
This means we could loose $50 to acquire a customer and still have a 75% profit. This $50 is your allowable acquisition cost. This information gives you a significant advantage over your competitors. Now you can advertise and sell your first product at a discount, to get the customer into your funnel and still make on average $350 from them over the next five years.
Discounting isn’t the only way to bring in new customers, but it is the most common. Now that you know your allowable acquisition cost, you can try all sorts of discounts without much risk.
Now rater than focusing on increasing conversion or click through rates, your focus is on how you can increase the lifetime value of each customer. Keep in mind this is two fold;
you can keep them buying from you for longer periods of time or spending more per year.
For more articles like this visit my blog AchieveItMarketing.com - Internet Marketing Blog
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Comments
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I think lifetime gross profit is a cool idea for people to figure out and understand. Your explanation is too arcane for anyone but an MBA student understand.Posted 10th December 2008 at 10:01 AM by David Neubert
