Repeat business means real profits

Mar 19, 2008

In the right circumstances, acquiring new customers at a break-even or slight loss can be an extremely cost- and time-effective way of achieving substantial business growth. It is also one of the most overlooked and under-used methods of business growth.

While this strategy shouldn’t be used by businesses that make one-off or infrequent sales, it can come into its own if a substantial portion of your sales and profits occur when clients return to make repeat purchases over months, years or decades. You won’t start to benefit from any of that profitable repeat business unless you get people to make their initial buying decision.

The idea then is to get as many prospects as possible into your buying stream as easily as you can, even if the initial sale is made at breakeven or a slight loss. The sooner you can get people to make that initial decision, the sooner you will start to benefit from repeat business, add-ons, referrals, and ancillary products and services that represent the bulk of your profits. That’s where this strategy starts to make sense.

To make this strategy work, you need to make it easy and irresistible for customers to start doing business with you. Many companies have been catapulted from obscurity to market leadership as a result.

Here’s an example of a struggling start-up company that used this strategy to run rings around huge competitors to became a corporate giant.

That start-up was AOL and in the mid-1990s its CEO Steve Case faced overwhelming competition in the race to dominate the internet from the likes of CompuServe and Prodigy, which were owned by wealthy corporate giants like Sears, IBM and H&R Block.

They could have obliterated AOL at will had AOL even been on their radar.
Prodigy spent $500 million launching its on-line service, selling its software through 500 Sears stores for $39.95 and charged $9.95 a month for its service.

The company was also spending $20 million a year on advertising and had signed up 500,000 subscribers. Mean-while, CompuServe had a million subscribers and was the world’s largest online service provider.

There was seemingly no way that AOL – which had 300,000 subscribers, annual revenues of $40 million and needed more investors – could compete with these big-spending giants. Steve Case decided to shift focus away from trying to make a profit on the acquisition of new customers and decided to make its real profit on all the repeat purchases from new customers.

He unleashed the fury of millions of AOL computer disks on an unsuspecting world. These disks allowed you to install AOL’s software on your computer free of charge and you could also connect to AOL for a month free of charge.

AOL initially just wanted to discover how many people would use the disks to log on and become paying subscribers if it gave them away. It spent $250,000 distributing the disks as computer magazine covers in a sealed plastic bag. It found that for every 100 disks they gave away, ten people became paying subscribers. With that kind of response, AOL could easily afford to distribute more and more … until disks were distributed everywhere.

If you bought a computer magazine, you got an AOL free disk. If you bought frozen supermarket steaks, you got a free AOL disk. If you ordered certain mail order goods, you got a free AOL disk. If you attended certain sporting events, you got a free AOL disk… You’d be hard pressed to find anyone who didn’t get dozens of free AOL disks in the mail.

When Steve Case pushed his marketing button in January 1994, AOL gained 70,000 new customers the same month. Eight months later it had signed on more than a million and over the next few years this number grew to 33 million. Within two years, AOL’s revenues had grown from $40 million a year to $298 million a month. And this, remember, was from a company that wasn’t even taken seriously by its competitors.

The strategy was so successful that AOL was overwhelmed for the next 12 months and had to fix a range of customer service issues to ensure that its rapidly increasing body of customers could even get on line when they wanted to.

It was a struggle to keep up but they eventually fixed the problems because they had all this new cash rolling in.

Had you been been working at Compuserve or Prodigy when this strategy was unleashed, you’d have thought that AOL had gone nuts. They had spent fortunes trying to persuade you to buy their software so that you could spend still more money using their services, whereas AOL just said: ‘Stick this disk into your computer and try it. You’ll get free email and the first month’s usage for free. You can go to a computer store and buy a competitor’s program for $39.95 or you can have AOL for free. Which will you take?’

This strategy resulted in an explosion of the on-line market and AOL quickly took the lion’s share. As its subscriber base grew, it freely stole customers from its competitors and eventually absorbed Compuserve. Prodigy disappeared and within a few years AOL became powerful enough to gobble up Time Warner, creating the world’s largest media company.

While the AOL Time Warner merger turned out to be one of the worst mergers in corporate history, the fact that it happened at all is testimony to the power of this strategy. So it really wasn’t so crazy after all.
Book, CD and DVD clubs have used the same strategy since the 1920s to generate revenues of tens of millions a year from customers to whom they initially sold at breakeven or a slight loss.

Credit cards offer interest-free balance transfers as an inducement to switch. Printer manufacturers virtually give away their inkjet printers and make their money on the expensive ink cartridges you’ll be buying for the next few years. Tetra Pak make € billions a year supplying reels of their packaging materials to thousands of packaging companies who use their machinery to make more than 100 billion cartons a year.

So what would it be worth to your business if you added ten, 100 or 1,000 more customers every month, if you did not make a penny on the initial transaction but made the profits on repeat business over the months and years to come?

If the numbers stack up for you, your first step should be to identify and understand how much combined profit a customer represents to you for the life of their business relationship with you. This will tell you how much time, effort and investment you can afford to make up front in acquiring each customer and to what extent you can afford to make all of your profits on the repeat business.

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