If there is one mantra you should adopt now and plan for in your business, it should be that repeat business equals profit.
The reality of business is that it costs anywhere from six to eight times as much to generate a new customer as it does to sell to an existing customer. And profits only start to accrue from new customers after a second, third or even fourth purchase.
So how can you plan for repeat business in your startup?
First, you must determine upfront the cost of "buying" a new customer for your business. What do I mean by "buying" a customer?
Instead of guessing how much to spend on sales and marketing, determine how much you are willing to spend to "buy" a customer. This will give you a more concrete way to create your budgets for marketing, customer appreciation strategies and referral programs.
So how do you determine the acquisition cost of getting a customer?
Say your $1,000 ad generates 100 phone calls. For each call or lead, you're paying $10 to drive people to your business. If 20 of those leads turn into buyers, you're paying $50 to capture each sale.
Let's also say you can plan for each customer to spend $500 with you, with $100 of that profit. How often would you continue to invest $50 into marketing? If you wanted to profit continually, you'd invest those dollars over and over again.
Knowing how much it costs to buy a customer also allows you to plan for and master the numbers around the lifetime value of your customer.
Years ago, I owned a dog food business. My average customer would spend $800 a year on their dogs, and the average dog lived about 10 years. I presumed a customer would stay with me half that time, meaning the lifetime value of my dog food customer would be $4,000.
Imagine if I created a repeat business program that both produced and rewarded referrals. If a single customer could be incentivized to buy on a monthly basis and was also prompted to refer two new customers to me, that would make a single customer worth $12,000.
What if those new referrals sent more referrals? How much value is that initial contact worth now? More importantly, what would I be willing to do to keep that single customer?
This long-term view of customer value is essential. Only when you realize a customer's lifetime value do you see the importance of developing great relationships with your customers. The goal of all that effort is, of course, to build a loyal base of raving fans--the ultimate key to building repeat and referral business.
So what should your repeat business plan look like?
Here are five key action points:
- Be diligent with your database. This is extremely important. In fact, the biggest asset for most companies long-term is their customer database. So plan for it, protect it, add to it and communicate with it at every opportunity.
- Make your communication personal and personable. Whether it's a letter, a brochure, a frequent buyer's card or an e-mail, make your communication to your database reflect the culture and personality of your business. Make everything represent the core principles of your company vision and mission.
- Make it easy for your customers to buy and keep buying. Lower the barriers to purchasing from you. A great way to test this is to pretend you are a customer trying to buy from your own company at least once a month. What, as a customer, would you change? Another way to lower buying barriers is to simply ask your best customers how you can make doing business with you easier.
- Decide what you can promise your customers. Make sure it is something you can deliver consistently each and every time. The basic rule is to "under-promise and over-deliver."
- Test and measure everything. From your ads to your numbers to your loyalty programs, make sure the numbers work at every level. Because whenever your marketing ROI fails to deliver, you can tweak or change your programs.
In the end, people buy from people they like and stay with companies they perceive care about them and stay connected with them. People are also willing to pay more for good service--when it's the service they desire.
Having all of these components driving your repeat business will allow you to develop a great competitive advantage for your company, and it's the foundation for referrals and word-of-mouth advertising, and that form of advertising continues to be the least expensive (and most effective) marketing you or anyone can "buy."
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.