Question: What is the most important secret to making more money in your business? Answer: You need a big back end which you get by focusing on back end marketing.
Let me explain.
The front end in marketing is the sales and profit you make on the first transaction you sell to a new customer and it has to fund all your customer acquisition costs.
The back end in marketing is the sales and profit you make on all the following transactions you sell to that customer plus any extra revenue and profit that comes from sustaining the relationship through referrals and third party endorsements.
To make the difference to clear to you, let's work through an example.
Front End Marketing
You have a product that you sell for £1,000 and you make 40% margin on it. So each extra sale creates a profit of £400.
But it costs you to attract and convert customers.
So you add up all your sales and marketing costs and divide it by the number of customers you have won in a period to calculate the average acquisition cost of a customer.
It works out at £150.
So when you deduct your customer acquisition cost from your profit on the front end sale, you make a net profit of £250 for every new customer who appears.
If you attract 100 customers, then you make £25,000 before your general and administration overheads.
That's nice but it is the hard way to grow your business because advertising, marketing and promotion - even with the best tactics and copywriting - can be risky.
Back End Marketing
But see how exiting it is if you introduce a back end to your business, either by offering your customer the chance to buy the same item again or by introducing them to extra services you can provide.
Some businesses are needs that naturally recur e.g. hair dressers, supermarkets while in other businesses you may need to be more imaginative. If you are a plumber and you provide a house with a new central heating system, you have the option of offering annual servicing, troubleshooting repairs and extra one-off purchases like a new bathroom.
So let's just say that you can make just one extra sale to your customer each year on average at the same £1,000 value at 40% margin.
This next transaction adds another £400 profit but you don't have the huge acquisition costs.
It is often said that it costs between 500% and 1,000% more to sell to a new customer than an existing customer.
So instead of thinking about £150 customer acquisition costs, we have say 20% or £30 as a transaction selling cost.
That means that this second transaction nets out at £370.
Or to put it another way, you have increased your profit per customer from £250 to £620 (250 plus 370) - a massive increase of 148%.
But your back end marketing doesn't stop there.
What about if the buy two items in the second year as well repeating the back end arithmetic.
That's another 2 times £370 profit or £740.
And takes your customer lifetime value of profit to £1,360 (620 plus 740).
So you are still marketing to your prospects and bringing in new businesses into the pipeline but you also focus on the needs of your existing customers to continually buy services.
If You Already Have Some Back End Sales
First of all, that is great because you know the idea works.
Customers generally like to buy from businesses they have dealt with in the past and been treated well.
But don't think "I already know and do this."
- What proportion of your customers come back and buy again? And most importantly could it be higher if you started a back end marketing campaign?
- Have you focused on developing back end products? Are there more opportunities to offer and promote additional products and services you can offer?
Can you see how your business has the opportunity for hidden profit, sitting in your customer list?
Turn Your Marketing Funnel Into A Marketing Hourglass
Are you familiar with the idea of a marketing funnel that starts with the suspects and turns a proportion into prospects and then customers?
If so, then I think that you will find the Marketing Hourglass concept that I have borrowed from John Jantsch and Duct Tape Marketing. I would have liked John to go further with the concept but I believe that it is so right to see the creation of the customer as the end of your customer acquisition process but also the start of a brand new customer extension process.
This is what I mean by hidden profit. You have done the hard work and attracted customers to you but too often, huge amounts of money are lost because the business is so pre-occupied bringing people into the top of the funnel that they don't see the profit opportunities in the second part of the marketing hourglass open up.