The True Value of a Customer

This is similar to a formula I learned in 1986 when I went to work for a radio station in Detroit that didn't subscribe to any of the ratings services and we didn't do business with advertising agencies.

It's the kind of information that cuts to the heart of what is really important in business, Customers Spending Money, which allows each and every business to operate.

Read and learn from Chuck Mckay:

How to Calculate Lifetime Customer Value

In How to Make Money by Losing Money" we introduced the concept of back end sales, and suggested it was worth giving away a $400 (retail) cellular telephone in order to get a $100 per month cellular telephone service contract.

How did we know? We simply subtracted the cost of the premium (the front end transaction) from the sum of back end profits over the lifetime of the vendor/customer relationship. In Part 3 we'll learn how to use the Customer Lifetime Value to calculate useful things, like ad budgets.

Our hypothetical telephone company is a small start up. It has 3,500 customers, each locked in to a twenty-four month service agreement. The company's net profit is $297,500 per month.

Over the first year of the contract those 3,500 customers will produce $7,140,000 in profit - approximately $1,020 each.

They will also produce $955 each in the second year. (There will frequently be a difference between year one and year two. More on that in a minute).

This means that even if every single customer stops doing business with this company, the lifetime value (profit) of every new customer this phone company can acquire is still $2,040.

Calculating LCV for your business.

This LCV number is important. Without it we can only guess at how much we are able to spend to acquire a new customer.

A. What is the profit on your average sale? $ _________

B. How many times will the average customer repurchase from you? _________

C. Multiply A by B to estimate your average customer's lifetime value. For your company that value is: $ _________

Lifetime Customer Value = Pt (profit per transaction) x R (number of customer reorders)

Of course, this is overly simplistic.

In the real world, Lifetime Customer Value is a moving target.

Under most conditions, not all of those cellular telephone customers will complete all 24 months of the service agreement. If 14 percent cancel during the first 12 months, 3,200 customers will enter year two of their relationship with the cellular provider.

At the conclusion of the second year we can estimate that, freed from their mandatory minimum service agreement, 70 percent will either upgrade to a new phone with the same company, or sign with a competitor. Either way, they'll be entering into a new 24-month agreement.

But the remaining 30 percent will appreciate the month-to-month nature of their new relationship with their cellular provider. 1,050 will enter year three with the company.

Also, the profit margin actually increases the longer a customer stays a customer, since older customers tend to consume fewer support services.

So, applying a bit more accuracy to our figures, the actual customer lifetime is three years. She'll generate $2,205 in value to the company during that lifetime.

Calculating Customer Reorders for your business.

Your average sale figure is pretty straightforward. Simply divide total revenue by number of transactions. Estimating the number of times a customer will make another purchase is a bit more difficult.

You could divide the number of total sales by the number of customers, but that leaves us with a bit of a problem. Can you spot it? Exactly. Newer customers will not have ordered as many times as a long-term customer would have.

We'll get more accurate data if we remove data from all customers who have not finished their relationship with you. But that means you must already have a good estimate for the length of time a customer is likely to continue to purchase from you. And if we knew that, we wouldn't have to estimate. (Author makes "I'm going crazy" sound of index finger thrumming on lips).

OK. Let's reconsider.

If you've been in business for several years, you can create a fairly accurate estimate by removing from your list of customers any who haven't ordered anything from you in the last 12 months. Now, select every fifth (or seventh, or thirteenth) remaining customer until you've created a significant sample. Fifty may be acceptable. One hundred is much better. The larger the sample, the more accurate your results.

Calculate the number of days between each customer's first order, and their last order with your company.

D. What is the number of days between the first purchase and the last for each customer in your sample? ___________

E. Sum the number of days as customers from each customer sample. The total is: _________

F. Now divide by the number of customers in your sample. ___________.

This is the average length of a customer relationship, in days. If you're a younger company and don't have records going back years, study your sales data. As closely as you can, estimate the length of the average customer relationship, in days.

G. Whether calculated, or estimated, how many days does this work out to be for your company? __________

Trim the database.

From your complete customer database, remove all data back as far back as the number of days in your average customer relationship. Count the number of sales transactions which remain, back to day one. Count the number of customers which remain, back to day one.

H. For your company the number of sales is: __________

I. For your company the number of customers is: __________

Divide the remaining total sales by the remaining number of customers and you'll have a highly accurate customer reorder number.

J. Divide H by I. The average number of reorders for your typical customer is: __________

The final step.

Divide the average profit per sale (from A, above) by the average number of reorders (from G).

K. That number, your true lifetime value of a customer, is: $___________.

You can add a degree of sophistication (and accuracy) by discounting the value of future cash flows. It's a bit complex, but if you're curious, drop me a note.

____________

Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about budgeting with lifetime customer value may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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Groupons, 1/2 Price Coupons, Are Not for Everyone

If you need a sale to get customers then:

1. Your regular prices are too high
2. You're lazy and uncreative
   
3. You are a new business
4. You are a shyster
   
5. You have problems retaining customers and building a loyal following

I know, it sounds pretty harsh.

Maybe 1 of the above is true. Like #3.

The "New Economy" has consumers demanding value for their money, not the cheapest price.

My group of radio stations is going to be launching a 1/2 price gift certificate program next month. We have studied others, looked for problems, found solutions and are confident that the version we kick off will have a better than average chance of success for the businesses we allow to participate.

Check out this report from Mediapost:

Expectations Important For Coupon Campaigns

Social couponing, in which online coupon offers go active once a minimum number of registered users sign on to them, has become a hot new promotional platform, at least for Groupon and Living Social. But new research finds that about a third of the merchants extending those discounts may find them a very mixed blessing.

According to study of 150 businesses by Rice University's Jones School of Business, of a coupon promotion by Groupon, those coupon campaigns were unprofitable for 32% of the businesses that ran them. And more than 40% of the response group said they would not run another social coupon promotion again.

According to Jones School associate professor Utpal Dholakia, the author of the research, the profitability of a coupon promotion can be measured by two main criteria: whether customers redeeming the coupons spent more than the coupon amount, and what percentage of those customers came back again to shop without a coupon offer.

Those survey respondents who said the campaigns had not been profitable for them reported that only about 25% of redeemers spent more than the face value of the coupon. They also said that about 13% of those coupon holders came back a second time to shop at full price.

The 66% who reported these promotions as profitable said that 50% of redeemers spent more than the value of the coupon, and 31% returned to become customers again at undiscounted prices. But even some of those businesses who reported successful promotions said they would not be likely to run another campaign on the platform, because the offers did not draw the right customers.

Dholakia found that marketers who set a ceiling on the number of coupons offered through the platform tended to see more demand. However, only 11% of the businesses studied in the survey imposed such coupon caps, and those that did set them relatively high at an average of 2,190 offers.

Foodservice businesses sold significantly more coupons than other types, the survey found:

· Restaurants made up the largest single business category in the response pool (32.7%)

· Educational services (14%)

· Salons and spas (12.7%)

· Tourism (8%)

Dholakia writes in the study that "... there is disillusionment with the extreme price-sensitive nature and transactional orientation of these consumers... they are not the relational customers that they had hoped for or the ones... necessary for their businesses' long-term success... "

The report concludes that coupon promotions can draw large customer surges into a business, but many of these will be either new users or price-conscious shoppers, unaware of the need to tip service employees or to tip based on the undiscounted price. Businesses need to consider that these consumers are bargain hunters. By nature they are frugal.

For additional information about the report, please visit Promo Magazine here.

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The New Normal in Car Sales

There's a young man named Brian who works at one of the most recognized car dealerships in Northeast Indiana, as the General Sales Manager.

Over the past 9 months, I've learned a lot from Brian about changes in his business. His dealership has lost inventory, because G.M. scaled back the number of brands they carry.

Gone is Saturn. Gone is Hummer. Gone is Pontiac.

What's left? Cadillac, Buick, and GMC Trucks.

And three empty buildings.

Brian has learned how to manage, though. He was recently promoted to GSM for the used cars along with his other duties.

There's a lesson for all of us. Our old ways of doing business are changing, and often those changes are beyond our control.

How we adapt however, IS in our control.

Check out this story about the auto business and perhaps you'll get some ideas on what you can do in your business:

Life At 11 Million U.S. Transactions

What To Do When You Lose 6 Million Sales? Shake Things Up, Top To Bottom

So how does the car business cope with the loss of nearly 6 million annual sales in the space of three years? It reinvents itself -- top to bottom.

Look around and you see a different auto industry taking shape -- a "transformational moment," says AutoNation Inc. CEO Mike Jackson.

Why are companies that struggled in 16 million sales years doing just fine in a market of 11 million? Because discipline is breaking out all over -- at manufacturers, suppliers and dealerships. A pragmatic, tightly controlled approach has evolved from the recession, and the changes touch almost everything.

Incentives are smaller, simpler and more tactical. No-haggle and limited-negotiation pricing are getting a real tryout across the country. And inventories are lean and balanced.

Here's how that's playing out in the showroom:

Pete DeLongchamps, head of manufacturer relations at retailer Group 1 Automotive, tells of a neighbor who said he planned to stop by his dealership, trade in his 140,000-mile Chevrolet Suburban SUV and drive out in a new one.

DeLongchamps gently explained the new reality: "The factory's working 10-hour shifts," he told his neighbor. "You can't get Suburbans."

So the guy ordered one with exactly the equipment he wanted and drove his old Suburban for eight weeks until delivery.

"Instead of walking the lot, we sit with our customers, talk about their needs, place orders and take deposits," DeLongchamps says.

That anecdote illustrates how the "push" system of building and selling vehicles is fading. Automakers are closely matching production to sales -- a dramatic change for the Detroit 3.

That means U.S. inventories are hovering near record lows -- 2.1 million cars and trucks on July 1, half of the 4.2 million that were in stock on July 1, 2004.

General Motors Co. -- which used to run its factories at any cost, trying to create demand with hefty incentives and high, low-profit fleet sales -- now is underproducing hot models. On July 1, Chevrolet had just a 22-day supply of the Equinox crossover, a 31-day supply of the Traverse crossover and a 37-day supply of the Suburban -- all well below the pre-crisis norm of 60 days.

GM wants dealers to operate with much lower inventories and turn their stock faster. But one executive says many are having trouble adjusting to the new paradigm and regularly scream for more inventory. The exceptions, he says, tend to be dealers who also have Toyota franchises and understand how to function with fewer vehicles on the lot.

Dennis Egglefield, owner of Egglefield Bros. Ford in Elizabethtown, N.Y., says he is forced to live with lower inventory.

That means he risks not getting Mustangs in time for his spring-summer season or four-wheel-drives before the snow flies. To compensate, the dealership is encouraging regular customers to order in advance and also is trading vehicles more often with surrounding dealerships.

"Our floorplan is down," he says, "not from necessity but because we can't get the merchandise. We do a lot more dealer swaps than we used to."

For manufacturers, leaner inventories mean lower incentives. Average June incentives were down more than $300 from the industry's peak of $3,165 per vehicle in March 2009, Edmunds.com says.

"There is no faster way to profitability than to cut incentives," says Dave Cole, chairman of the Center for Automotive Research.

Structural change
Carmakers -- and not just Chapter 11 survivors GM and Chrysler Group -- have taken advantage of the crisis to fix structural problems.

Toyota, for example, had too many factories below capacity in 2008. This year it has closed NUMMI in California, consolidated Tundra pickup production in San Antonio and revamped plans at its new Tupelo, Miss., plant. Instead of the Prius hybrid, Toyota will make the high-volume Corolla in Mississippi.

Supplier relationships are changing, too. All three Detroit 3 purchasing bosses -- recognizing the difficulty of getting by without the technology and expertise of key partners -- have vowed to collaborate more closely with suppliers.

For instance, Chrysler this summer began offering more formal protections to suppliers. Previously, says purchasing boss Dan Knott, "I could pull the trigger at the last minute" and drop a supplier because "I didn't like the way you look."

Conversely, some old loyalties are crumbling. Auto advertising was once known for its stability, but a few of the oldest ties between carmakers and agencies -- Campbell-Ewald and Chevrolet, for example -- were severed this year as automakers struggle to re-establish brands and shake off tired stereotypes.

Dealers' new approach
Nowhere is the change more profound than at dealerships. Dealers have slashed costs in every corner of their stores to focus on the bottom line. Because of those cuts, many say they'll be profitable this year no matter what.

The combination of lower sales and shrinking margins has led dealers to experiment with new ways of paying salespeople. The traditional straight commission of 20 percent of gross profit has so squeezed salespeople that dealers fear a wave of departures.

A common switch: Pay a base salary plus commission.

With finance and insurance revenue falling as a result of lower sales, some dealers have cut dedicated F&I staff and let salespeople share some F&I commissions.

Some dealers are pushing their service departments to compete with repair chains such as Jiffy Lube. And they are tinkering with new pricing models, testing variations of no-haggle selling. By the middle of this decade, AutoNation plans to have all of its 200-plus stores using low everyday prices and limited negotiations.

Smarter suppliers
Suppliers that happily used to accept jobs with razor-thin margins just to keep their factories running are concentrating on contracts that are sure winners.

"You can't just launch 10 different car platforms (and have) four of them be winners and six of them losers," says BorgWarner CEO Tim Manganello. "That's a recipe for disaster. You need nine out of 10 winners."

Behr America CEO Heinz Otto says suppliers are chasing margins above 5 percent of sales. In the past they were OK with 2 or 3 percent, he says.

There's a dark side to the new emphasis on the bottom line: Many suppliers are moving engineering jobs out of the United States.

"You always have to look at your engineering structure -- and how possible is it to use engineering resources that are offshore," says James Rosseau, CEO of Magneti Marelli USA. "We offshore certain administration functions to reduce costs. I don't think we'll revert. The support functions, I believe, are gone."

With their lower breakevens, parts makers are poised for strong profits at today's volumes of 11 million to 12 million units annually.

That could be critical. Rebecca Lindland, head of auto research for the Americas at IHS Automotive, says current low sales are not building future demand but instead are working off the excess supply of the past.

"There's very little pent-up demand," she says.

Permanent? Or just a blip?
Are these changes permanent, or will they disappear with the first sign that things are back to "normal"?

It's a crucial question, since analysts say the industry's long-term health rests on continued discipline.

"We have a greater opportunity to make change that's permanent," says Jeff Schuster, head auto forecaster for J.D. Power and Associates.

"But as the sun comes out, it's easy to let go of some things you have learned."

(Source: Automotive News, 08/02/10)

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The True Value

Seth wrote this last week:

Embracing lifetime value

If you walk into a company-owned cell phone store to sign up for a contract, what are you worth?

Given the huge gross margins at AT&T and Verizon and the standard two-year contract, I think it's easy to figure on more than $2000 in lifetime value.

If you ran a business where a customer represented an additional $2,000 in profit, how would you staff? How long would you make someone wait? If staff costs $25 an hour, how long would that extra person take to pay off?

Few businesses understand (really understand) just how much a customer is worth. Add to this the additional profit you get from a delighted customer spreading the word--it can easily double or triple the lifetime value.

So, a chiropractor might see a new patient being worth $2,500, easily. And yet... how much is she spending on courting, catering to and seducing that new customer? My guess is that $50 feels like a lot to the doc. Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it's important to not only recognize but embrace the true lifetime value of one more customer.

Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers? That's more money than you have to spend right now, I know that, but what would happen? Imagine how fast you would grow, how quickly the word would spread.

Here's how you'll know when you've really embraced this--a good customer at your podiatry practice (or supermarket or tax firm) walks out the door in a huff and you turn to your partner and say, "There goes $74,000."

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The Case for/against Coupons

I always enjoy the writings of Chuck McKay:

Free Coffee and the Incremental Discount Coupon Tactic

As I headed out the door the Lovely Mrs. McKay handed me a coupon from the new C store in our neighborhood, saying “You've got to stop for gas anyway. Here's a coffee for the road.”

The coupon offered a “free coffee beverage” from, oh, let's call 'em “Comfort Brothers Gas Station and Convenience Store.” I thanked her and slipped it in my pocket.

Does a lower price boost sales?

Will the availability of a discount, or a membership card, or a “get one free after purchasing ten” punched card appeal to everyone? Of course not. Some shoppers enjoy clipping, collecting, and organizing coupons to take advantage of reduced prices on household goods. Others see the time required by that process to be part of the price they pay for your service (or product), and will happily agree to full rate not to be bothered with it.

If you offer a discount to shoppers who would have paid full price, you lower profitability. On the other hand, not discounting for the undecided leaves some inventory unsold. That reduces potential gross sales.

How can you tell which is which?

The answer is to let them select themselves.

Make multiple offers at different price points to maximize sales. Those who wish to pay full price may do so, and those who won't will find a subsequent price/value ratio which works for them.

Here's how to make it work:

Let's imagine you have purchased a mailing list of high probability prospects for your new service. Send a letter, or post card, or other mailing piece to the entire list. Offer to sell them your service. Explain why you offer a good value. Some will purchase. Move their names from your “general” list to the “paid full price” list. Guard this new list. The names are golden.

A couple of weeks after your first mailing, send a twenty percent off coupon to everyone who remains on your “general” list. Segregate the names of those who respond to your second mailing into a “twenty percent discount” list.

In ten more days send the remaining names on your “general” list a thirty percent off coupon. See how this works?

You're accomplishing two things through this process.

First, you're maximizing sales at every price point. Second, you're segmenting your general list into groups of people who have now revealed the price at which they're likely to find your future offerings appealing.

The percentage who bought from your very first mailing, divided by the total number of pieces mailed, is your base conversion rate. Over the next few months you might get as much as ten percent more than your base conversion rate, by offering these incremental increases in discounts. Expect the biggest response to be to your first coupon mailing. Each successive offer will produce a smaller number of buyers who will decide the price is finally right.

Of course, the biggest factor which determines your base conversion rate is the offer itself.

Specific dollars (cents) off tend to be more appealing than do percentages, although that can be affected by the market and the range of prices. Another proven appeal is to offer a reward such as free shipping or gift wrapping, or a free upgrade to anyone who spends a minimum amount.

And you'll always want to print expiration dates as part of your call-to-action to force a decision. “This offer good this weekend only,” or “Offer limited to the first 100 customers or close of business Friday, whichever comes first.”

But, I digress from my personal coupon story.

After gassing up the car, I went inside to pay and to pick up a cup for the road.

The coffee menu offered “a full-line of latte and mocha beverages served hot, iced and frozen, with gourmet flavored syrups and chocolates." Every conceivable latte, espresso, and cappuccino. Full caffeine, half caf, caffeine free. With and without sweeteners, cinnamon, or chocolate. Iced lattes and mochas. Frozen lattes and mochas.

Thinking of my blood sugar, I finally decided on a simple cup of house blend.

I presented my coupon and was told that they couldn't honor it as payment for plain coffee. The offer, as I could plainly see, was for one of their prepared coffee beverages. Not for a simple cup of coffee.

“Are you serious,” I asked? “You're willing to make a generous gift of a $4.50 banana caramel iced mocha, but you won't let me have a simple sixty-nine cent cup of coffee?” Again, the attendant pointed out that the coupon clearly offered a “free coffee beverage,” and not a free cup of coffee. I handed the woman a dollar, took my change, and headed down the road.

Years ago I watched an older lady present a coupon for a Big Mac at a Burger King restaurant. The young man behind the counter said, "Ma'am, this is a coupon for a McDonald's sandwich. We have a very similar sandwich called the Whopper. May I get one for you at this same price?" This young man gracefully helped his customer avoid embarrassment. Care to bet she became a loyal customer?

I hope my experience was not typical. I hope that the tens of thousands of coupons the Comfort Brothers spent on their grand opening paid off handsomely. In truth they have a beautiful store. It's spotless, modern, and well laid out. The staff is friendly, well trained, well dressed. Shopping in their store should be a pleasure. I'm sure for most people it is.

But I only remember that when I presented my coupon, they told me "No." And that's a tough first experience to overcome.

__________

Chuck McKay is a marketing consultant who helps customers discover, and choose your business. Questions about implementing an incrementally discounted coupon tactic may be directed to ChuckMcKay@ChuckMcKayOnLine.com.

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Saving Money & Saving Jobs

As I work with business owners, part of what I do is help them look at ways to find the money to promote themselves. After all, out of sight leads to out of mind, which leads to out of business.

Check out this recent story from Forbes:





Entrepreneurs
Creative Cost-Cutting Tactics For Small Biz
Melanie Lindner 11.17.08, 6:00 AM ET

With credit locked up and consumers on the sidelines, small businesses should be sleuthing for any and all ways to shave expenses. Chopping heads only gets you so far--slice into muscle and you may be too hobbled to ride the rebound.

"Many think that the next step is to eliminate head count, but they will almost certainly be late when recovery comes," says Ken Hagerstrom, chief executive of Carlsbad, Calif.-based consultancy Expense Reduction Analysts.

With that in mind, we canvassed small business owners and consultants across the country to root out a host of creative cost-cutting techniques.

In Pictures: 14 Creative Ways To Keep Costs Down

Serious cost cutting means looking everywhere--even at the very packages that you send through the mail. Aaron Rubin, chief executive of karatedepot.com, an online karate-equipment retailer, cut costs by switching from the free boxes used by the United States Postal Service to lighter, bubble protected plastic envelopes. While he has to pay for the envelopes, the difference in weight is so significant that it costs him less than using the free boxes.

"If you get a package down from one pound, one ounce to less than one pound, the saving for priority mail is over $3 per package," says Rubin.

Sharing office space can save more than a few bucks. Tyler Jorgenson, a real estate broker in Chino, Calif., recently renegotiated his lease to include a provision for subleasing. He's now renting out 65% of his location and charging two tenants enough to cover his entire rent. One of the conditions of the deal is that Jorgenson pays for the utilities and Internet connection for the whole office (which he would have to do anyway if he didn't have tenants).

Sometimes you have to lie down with competitors for survival. Group-purchasing organizations like the Council of Small Business Enterprise in Cleveland negotiates on behalf of nearly 17,000 members to get better deals on everything from employee benefit programs to office supplies. Buying in bulk lowers everyone's rates.

If after preliminary layoffs your payroll is still weighing you down, consider turning your line workers into entrepreneurs.

Say your firm writes software. Instead of chopping overhead by chopping heads, let each of the developers take charge of their own product while you take a stake in their efforts. In lieu of a salary, offer them partial support (in terms of marketing, product testing and health benefits) to build out their slice of the business and, with any luck, substantially increase their wealth. If all goes well, everyone wins.

Don't forget to crack open your information technology expenses. You could pay $15 a month for conference-calling services offered by the likes of AccuConference, which allows an unlimited number of callers to convene for up to 10 hours per call. For that price, you get special features like the ability to poll participants during the call and, if they have a computer nearby, real-time viewing of Power Point presentations.

Or you could pay nothing at the slightly stripped-down freeconferencecall.com, which allows up to 96 callers to have a maximum six-hour conference call. You can call in by phone or computer; record and reply to the call and share it by RSS feed or podcast. Cost: only your usual long distance fees.

Cash-strapped manufacturers and other businesses with significant hard assets should take advantage of Section 179 of the United States Internal Revenue Tax Code. This provision allows deductions for "tangible" assets such as property and equipment.

In 2007, the maximum deduction was just $125,000, but for 2008 and 2009, the IRS raised the amount to $250,000. If you're thinking of buying, say, a new truck and want that deduction, do it within the next year because the maximum deduction will drop back down to $125,000 in 2010. (For a complete description of property eligible for Section 179 deductions, click here.)

Short on cash to cover year-end bonuses? Offer a few extra paid vacation days for the coming year instead. That way, you can still compensate employees for hours they didn't work, but you don't have to lay out all that cash in one shot.

This one may be a tough sell during the holidays--but, hey, it's worth a shot.

In Pictures: 14 Creative Ways To Keep Costs Down

In Pictures: 12 Innovative Marketing Techniques

In Pictures: Lessons From Seven Graybeard Entrepreneurs

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Please your Customers? or P.O. your Customers?

And by P.O. I'm not talking about Post Office.

The airlines are in a fight to survive we've been told, so they are giving less and charging more. They are in a monopolistic situation however. If you need to get from here to there, fast, you need to fly.

But if you have any competition, and that is competition for your customers money, you better read what Seth Godin wrote this last week:

The bitter taste of nickels and dimes

Stopped by a Whole Foods early one morning this week for an iced tea.

I ordered a hot rooibos (you should try it) poured over a glass of ice.

Whole Foods is under two kinds of pressure: shareholders that want better results, and consumers who point out that it's really expensive. They're working hard to position themselves as not so expensive.

Anyway, the tea was $1.79 (a 90% gross margin) but the ice cost 50 cents extra.

Huh?

I mentioned to the cash register person that I wasn't going to pay fifty cents for ice. Understandingly, she said, "no problem."

And then, instead of doing what I expected (giving me the precious ice for free), she didn't give me the ice. I had hot tea. I got what I paid for.

The thing is, Whole Foods didn't get what they wanted. They focused on the add on revenue and generated ill will. No joy in Mudville that morning.

The problem with the infinite add on gross margin strategy is that it doesn't work on everyone. The problem with charging $95 to deliver a $10,000 purchase is that all the buyer remembers is the indignity of the add on.

Here's my advice: have all the add ons you want. But waive them early and often. Waive the charges for great customers or for customers that make a face or just because it's Tuesday. "Well, the to go charge is usually a dollar, but since you come here a lot, no charge for you."

It's not about charging less. It's about delight.

And for more on the Whole Foods story, click here.

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3 ways to grow when business slows

This morning you are going to learn how to get a bigger bang for your buck and learn how to negotiate with people like me (plus two other tips). This is from BusinessKnowHow.com:

3 Secrets to Growing Your Business in a Slow Economy

by Bob Leduc

Bad economic news doesn't have to be bad news for your small business. Your business can thrive and grow in a slowing economy if you make it recession-proof. Here are 3 things you can do immediately to start recession-proofing your business.

1. Get More for Your Advertising Expense

The return on your advertising expense will shrink during bad economic times unless you take specific actions to prevent it. Look for ways to keep your sales volume growing without increasing your advertising expense. For example:

** Negotiate Price With Advertisers
Advertisers are hit hard during an economic slump. Many are willing to negotiate a special discount to keep your business -- or to get it away from their competitors. Take the initiative when you're placing an ad. Ask for a discount ..or a bigger discount than one already offered.

** Trim Your Ads
Reduce the size of your ads so you can run more ads without increasing your total cost. Don't be surprised if some of your short ads generate a bigger response than your long ads. The most effective ad I ever used was only 11 words.

** Generate Free Publicity
Start a publicity program for your business ...or expand the one you already have. Publicity produces sales for a much lower cost then advertising. For example, find something newsworthy about your business. Write about it in a news release and distribute it to publishers.

2. Take Advantage of Your Existing Customers

Your customers already know you and trust you. It's easier and cheaper to get more business from them than to get any business from new prospects. Here are 2 ways to use your relationship with customers to generate additional business.

Offer Them Related Products Or Services
Find or create additional products and services you can offer to existing customers (and to new prospects). Your new products or services should be closely related to those your customers originally bought from you.

For example, I recently spoke with a network marketer selling nutritional products. She also works with a health club that pays her a commission for each new member she signs up. Over one third of her income is generated by offering the related product to her customers.

Ask Them To Help You Find New Customers
Ask your customers for referrals. Reward them for each referral that becomes a customer. Your reward could be a discount on their next order or a special bonus item. Announce your referral program to customers with low cost communication tools like email, postcards or personal phone calls.

3. Offer Some "Big Ticket" Items

Some of your potential customers are not affected by a poor economy -- or they benefit from it. Others may place a higher value on your products or services when the economy is bad. These prospects are willing spend much more with you than your average customer. Don't forfeit this income. Find or create additional products or services similar to those you now offer ...but with a much higher price.

For example, one online marketer recently packaged her latest "how to" book with several eBooks and a "members only" website. She priced this special package about 8 times more than the average size order placed by her customers.

Her number of sales declined when the economy slowed down. But her sales volume and net profit are still growing. The dollars produced by a small number of these "big ticket" sales more than replaced the dollars she lost because of fewer average size sales.

Your business can thrive and grow during an economic slowdown if you make it recession-proof. Use these 3 proven marketing tactics to start recession-proofing your business.

Copyright Bob Leduc

Bob Leduc retired from a 30 year career of recruiting sales personnel and developing sales leads. He is now a Sales Consultant. Bob recently wrote a manual for small business owners titled "How to Build Your Small Business Fast With Simple Postcards" and several other publications to help small businesses grow and prosper. For more information... mailto:BobLeduc@aol.com?subject=Postcards Phone: (702) 658-1707 (After 10 AM Pacific time) Or write: Bob Leduc, PO Box 33628, Las Vegas, NV 89133

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Free is Better than 50% off

I advice my clients not to offer specials or sales or discounts, most of the time. Why? It changes their product or service into a commodity that gets it value from price. And there is always someone who will sell at a lower price.

That's the philosophy behind Walmart. And do you think you can beat Walmart on price!?!?

On the other hand, one of my clients is McDonalds. And recently they have used FREE as a way to get folks to try a new product. Others are learning that FREE can be better than a Discount for both the retailer and the customer.

Restaurants' Latest Marketing Tactic: Free Food

Something totally unexpected occurred when Zaxby's, a chain specializing in chicken fingers and Buffalo wings, offered a new product for free on July 7: Sales rose 5 percent compared with that same day a year earlier.

Zaxby's wasn't counting on an instant sales boost. Its plan was merely to get customers into restaurants to try the Nibbler, the chain's first snack product, to see whether it could compete against rivals' comparable products.

"The goal was to drive new interest," said Jenifer Harmon, vice president and account group director for St. John & Partners, Zaxby's ad agency, which created the giveaway promotion. "What in fact happened was we increased traffic across the board. The [promotional] buzz for one little, tiny sandwich drove so much incremental sales and interest in the brand."

That effectively sums up why more chains are giving away menu items: Enticed by a freebie, customers will come in and buy other products, and if they're new customers they'll come back for more.

This growing marketing tactic goes beyond traditional buy-one-get-one-free offers, which operators and marketing experts agree can erode a brand's value. Customers did not have to make a purchase to get a free cup of Starbucks' Pike Place Roast when the chain reintroduced the blend.

McDonald's gave away free coffee when it introduced its premium-roast product. Jamba Juice offered free smoothies this spring, and A&W All American Food restaurants handed out free root beer floats in a one-day promotion last month. Domino's Pizza will award $1,000 in gift certificates to the winner of its recently concluded "staycation" promotion, and Taco Bell gave away its new Frutista Freeze for a week to anyone who requested one.

There's an urgency now to dangle a freebie in front of consumers, and the reason is clear.

"There's nothing like a recession to keep people at home, so it takes something as drastic as the promise of free things to get those same people in their cars and out to eat," said Tonya Hamilton, founder of Hamilton Strategic Marketing in Madison, Wis.

Zaxby's had a different reason for its giveaway. The chain's same-store sales have increased for three consecutive years, Harmon said, but consumers' eating habits are changing and they're looking for snacks. When Zaxby's decided to offer the limited-time Nibbler, priced at $1.39, the best way to let consumers know about it was to give it away, Harmon said.

The Athens, Ga.-based chain, with more than 435 units in 12 states, promoted the giveaway for a week with in-store material and online banner ads, which allowed customers to save the date of the giveaway to their Facebook or Microsoft Outlook accounts.

"What we found is that we got this incredible buzz going," Harmon said.

Buzz is precisely what giveaways are supposed to generate to get consumers to try a brand for the first time or increase their visits, and Zaxby's strong sales for the event is not unusual, said Tim Hackbardt, a former Taco Time and Del Taco marketing executive who founded White Barn Group, a strategic restaurant marketing and ad agency in San Juan Capistrano, Calif.

Consumers will buy additional menu items when they come in for their freebies, he said, and because the giveaway usually generates a lot of awareness for the brand, "you get spill-off into other dayparts" from consumers who aren't looking for a deal but buy something because the brand is now in their consideration set.

Hackbardt recalled his first job in restaurant marketing, when he was hired by a Pizza Hut franchisee to promote a particular location.

"He told me his secret," Hackbardt said. "'You give away as much food as you want. If I don't get food in [customers'] mouths, they won't come back.'"

Giveaways are not like discounting, he said, because customers understand that a freebie is a one-time deal.

Discounting, however, can condition consumers to buy only when a deal is offered and cheapens the brand, according to speakers at the Nasdaq Food and Restaurant Industry Forum, held last month in New York.

Discounting "cannot overtake your brand in the long term," said Todd Townsend, chief marketing officer for Sonic Drive-In. Although there's a need to provide discounts, as Sonic does with its Happy Hour, he said restaurants have to be careful not to overdo it.

Kay O'Leary, chief financial officer at Caribou Coffee, echoed that concern: "Consumers get trained on discounting. Customers will learn to actually wait for that discount."

Zaxby's "is not a believer in discounts," Harmon said. "You lower the value of the product. Free is a different thing."

Harmon pointed to the success of Chick-fil-A's First 100 Fans program, which awards a one-year supply of free food to the first 100 adults at grand openings. Chain president Dan Cathy said Chick-fil-A has given away more than $7 million in free food since the program began in 2003.

"Does it devalue the brand? Not at all," Harmon said. "Their loyal fans are even more loyal."

Giveaways are not a marketing tool used solely by large chains, however. Tampa, Fla.-based Evos, a six-unit quick-service chain that boasts health-oriented burgers, fries and shakes, opened a unit in Chapel Hill, N.C., earlier this month and celebrated the grand opening with a direct-mail campaign inviting 10,000 people to come in for a free meal.

Evos doesn't discount its meals, but the chain does believe that a giveaway is important in generating brand awareness, said Bernie Hinson, area development representative for SKS Healthy Foods LLC, master developer and franchisee of Evos restaurants in metropolitan Atlanta and North Carolina.

"It's an invitation to experience the brand," he said. "We would just like people to try the food. We're very proud of our products."

(Source: Nation's Restaurant News, 07/21/08)

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Location, location, location

Your location is part of your marketing.

Especially, (but not exclusively), if you are a retailer and you need foot traffic. One day I'll write about a formula for determining how to figure the cost of your location as it relates to the rest of your advertising/marketing budget.

But for now, I'm going to point you to a common sense approach that you can do this week, to see whether or not the location you've been eyeing is as good an investment as the agent is trying to convince you it is.

(By the way, the above picture is an artists rendering of Jefferson Pointe, an outdoor mall located right here in Fort Wayne, Indiana!)

Tim Knox:

This week we discuss how to find the best location for your business. This isn’t a difficult process, but will require some homework on your part. You can use a commercial realtor to help you scout for locations, but the real research you must do yourself.

When I was scouting locations for my brick and mortar store I took the time to drive around town to familiarize myself with every foot of vacant retail space available.

I spent a lot of time sitting in parking lots. You can learn a lot just watching cars go by at different times of the day. For example a location may be great in the morning, but lousy in the afternoon. Or maybe the parking lot is full at lunch, but empty the rest of the day.

You should also consider which side of the road works best for you. For example a drive thru coffee shop has a much better chance of success if it’s located on the side of the road with the morning rush hour traffic, while a takeout joint has a better chance of success if it’s located on the side of the road with the going home traffic.

Read the rest of the article here.

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Is Superbowl Advertising worth the money?

We are still getting feedback from the Superbowl and the gross amounts of money spent to advertise and when you throw in the production costs for those commercials, people are wondering, is it worth it?

Let's say you take 4 million dollars. You probably cover the production costs of a basic ad, and get your shot at 30 seconds of fame.

If you were able to get just 50% of the estimated 95 million plus viewers to see your commercial, your cost per person would be less than 9 cents! Problem is that is only 1 impression per person, and human behavior does not work that way to generate response (in most cases).

However, this year the problem of just one impression is solved by the device you are looking at right now.

Yes, the internet, is where those 30 seconds of tv time will live forever, and be played more than once. The best will be seen perhaps dozens of times by a certain group of people who want to see the ads again, and again, and again.

As a matter of fact, there are people that did not see the 30 second ad during the Superbowl, that WILL see the ad online. This is classic Word Of Mouth, which is how human behavior works.

Now more than any other Superbowl, ever, the money spent was well worth it..... IF and this is a BIG IF.... IF The commercial was memorable for the product or service and motivates action and/or branding.

The folks at TNS and MarketingCharts.com have more on this subject:

More Super Bowl XLII Advertising Stats Than You Can Shake a Stick at

Data on spending trends across categories, viewers’ reactions, impact on commercial ratings, and social-media buzz are included in a TNS analysis of Super Bowl commercial winners and losers issued this week.

TNS Media Intelligence, TNS Media Research, TNS Media and Entertainment and TNS Media Intelligence/Cymfony provided the information. Below, among the findings released by TNS.

Advertising Trends across Brand Categories

Record-Setting Level of Ad Time

Super Bowl XLII featured a record-setting amount of network commercial time, according to TNS Media Intelligence:

• Between the opening kickoff and the final gun, Fox aired 45:10 mm:ss of advertising messages, including paying sponsors, messages from the NFL and promotional plugs from Fox for its own programming.
• The past three games now occupy the top three spots in terms of Super Bowl ad clutter:

Category Wars: Battle of the Brands

Anheuser-Busch was again the exclusive beer advertiser in the Super Bowl - in contrast to the message clutter from movie studios and non-alcoholic beverage brands:

• Consistent with recent years’ trend, eight motion pictures were advertised in the game - the largest number of competing messages from any single category.
• There was a surge in advertising from non-alcoholic beverages, as well:
  • Six brands aired spots in the game, an all-time high for this segment.
  • Along with the familiar presence of Pepsi and Coke sodas, there were competing messages for energy drinks (Gatorade; Amp) and flavored waters (SoBe Life; Glaceau Vitamin Water).
• Combined, movies and non-alcoholic beverages accounted for approximately 30% of the paid ad time in the game.

Second-by-Second Commercial Ratings

TNS Media Research analyzed audience viewing behavior during the game and the commercial breaks. The following highlights are based on second-by-second clickstream data collected from over 300,000 Households (HHs) in the Charter Communications Los Angeles digital cable system:

• On average, 30.3% of HHs tuned in to the game itself. The pre-game show averaged a 23.7% rating, while over 33.7% of homes viewed at least one second of the post-game award presentation.
• 5.7% of HHs viewed the game on FOX-HD - close to 19% of the total audience.
• As expected, few viewers tuned away from the commercial breaks during the game with the spot-to-program retention index averaging 100 (Commercial Viewing Index):
  • The highest commercial retention score went to the Ford F Truck - F Series 30-second commercial, which posted a 112 in the spot just prior to kick-off.
  • Not surprisingly, the lowest commercial retention occurred during the post-game as viewing dropped from a rating of 31.4% to 21.6%: The last pod, airing prior to House, averaged a CVI retention score of 78.
• A second-by-second look at commercial avoidance reveals that less than 1% of commercial seconds were avoided by channel changing.
• The FOX-HD audience was even less likely to tune away, with only 0.5% of those seconds being lost, perhaps reflecting that almost all of the Super Bowl advertising was presented in high definition.

Which Commercials Delivered on Their $2 Million+ Price Tag

TNS Media and Entertainment surveyed online a nationally representative sample of 1,048 adults 18-54 years of age on Monday February 4 who had watched the Super Bowl victory over the New England Patriots. All respondents were panelists from the TNS 6th Dimension Interactive Panel. Among the findings:

Levels of Recall

On average, each Super Bowl viewer recalled 39 commercials. The E*Trade Financial Services commercial featuring the talking baby garnered the highest level of recall - 70% of all Super Bowl viewers. The following closely followed:

• Bud Light: Jackie Moon (69% recall)
• Budweiser: Horse training to Rocky theme (67% recall)
• Sobe LifeWater: Naomi Campbell with lizards (67% recall)
• E*Trade Financial: Talking baby with clown in background (66% recall)

Best- and Worst-Performing Ads

All 79 commercials broadcast during the game were evaluated on three dimensions among respondents who recalled the commercials - commercial likeability, positive brand impact, future purchase consideration - which comprise the Commercial Performance Index (CPI).

The best performing commercials based on the TNS CPI were as follows:

• Budweiser: Horse Training to Rocky Theme (+387 CPI)
• Coca Cola Classic: Charlie Brown Balloon (+373 CPI)
• Bridgestone Tires: Screaming Animals (+352 CPI)
• National Football League: Living A Dream (+321 CPI)

The ads ranked with the lowest CPI:

• SalesGenie.com; Ramesh (-307 CPI)
• SalesGenie.com: Pandas (-237 CPI)
• Zantac (-129 CPI)
• Sunsilk (-118 CPI)

Pod Position Effects

TNS researchers also uncovered an interesting finding: ads in the first pod position had higher average CPI scores than ads elsewhere in the commercial break. This has relevance to the ongoing industry discussion about commercial placement and commercial pod construction.

Buzz Generated in Social Media

TNS Media Intelligence/Cymfony analyzed the level of online discussion about Super Bowl commercials on social media. As of mid-day Monday, February 4, only seven brands were generating significant levels of discussion.

High Volume of Discussion

• Overall, viewers are highly positive toward the ads. Anheuser-Busch (representing the sum of discussion of all individual Budweiser and Bud Light ads) is getting twice the conversation of second-place Audi.
• GoDaddy is getting significant discussion but it skews negative. Strong negative feelings are, understandably, a driver of discussion.
• Coca-Cola discussion is extraordinarily positive - viewers enjoyed the Balloon and Carville/Frist ads.
• Both TNS’s CPI scores and Cymfony’s analysis put Anheuser Busch, Bridgestone and E*Trade in the top tier.
• Interestingly, a number of advertisers did well in CPI, but not in social media discussion, including NFL, Tide and most in the movies category.

Low Volume of Discussion

Salesgenie.com has low volume, but the posts are strongly negative. Many of them express the opinion that the commercial used racially offensive stereotypes.

This year, ads with upbeat, positive messages were effective with consumers and also generated additional brand value in word of mouth.

See TNS’s Super Bowl XLII 2008 Creative Log for a complete log of all Super Bowl 2008 commercials and the full detail of TNS’s Super Bowl research.

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Measuring results

Just how do you measure the results of your marketing efforts? It depends on the circumstances.

About two weeks ago, a new McDonald's opened in town. They are one of my clients. They had a soft opening on September 27th, and then they will have their official Grand Opening Celebration this coming Saturday complete with Marching Bands, a radio remote broadcast, a ribbon cutting ceremony and the like.

Whatever happens this Saturday will be fine, we already had a successful opening. The owner gave away a years worth of Quarter Pounders to the first 50 people that showed up on September 27th. We promoted it on the radio.

I stopped by at 7:15 that morning to see how things went when I was told what happened while I was sleeping: 4:15am, the owner-operator comes in and there are a dozen people waiting for them to open the doors at 5am! By 4:45am there are 70 people in line!

Let's measure the results: 50 1/4 pounders retail at 3 bucks each. That's 150 dollars times 52 weeks = $7800. Actual food cost is about $2500 or less. Let's say that the only customers they get from the promotion is the 70 that showed up before they opened their doors. Lunch customers are likely to visit an average of twice a week. Let's presume they spend $5.00 each trip. The cost of food to McDonalds is about $2.00. So do the math and there is 6 dollars profit times 52 weeks times 70 people = $21,840 profit for an investment of $2500. Even 1/2 that amount is quadrupling his investment!

Note that this investment is over the course of a year, and that the buying cycle repeats itself every 3 or 4 days.




This afternoon, I spoke with a friend of mine that asked me what a commercial cost on my radio stations. I called him up and we met and discussed the real issues. He had run a newspaper ad that cost him between $700 and $800 each time he aired it. He thought it was expensive. As we talked, we discovered that the paper gave him a deal where it ran the ad Saturday (free), Sunday (paid), and in a weekly employment supplement (free) and posted it on their website for 30 days each time he paid.

The first time it ran he got about 30 inquiries, from which looks like he will get 2 new employees. The second time he ran, he got about 10 inquiries, from which looks like he will get 2 more new employees. What's the bottom line here? So far, his experience with the paper is it costs about $375 to find a new employee using their method. Is this a reasonable cost? Don't know yet. But at least we know how to measure the results. And why did the first 30 inquiries only net 2 employees, while the next 10 inquiries also produced 2 employees? Which was more effective? I believe the second, because while the end results were the same, the second was more efficient, saving time and expense of screening out those that did not qualify.

I am in the process of consulting with others in the advertising world in my town to see what they might have to offer that could produce better net results for the dollars he has available to spend, and I also have a proposal that I believe can work, using my radio resources too.

Your thoughts and comments are welcome...

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