The Problem with “Free” Customers

by Tim Francis on December 21, 2012

One of my clients had a huge crisis come up.  20% of their revenue suddenly disappeared when a few big contracts suddenly evaporated.

Could you lose 20% of your revenue and easily buy new customers to replace the expired?

Pretty precarious position if you can’t….

The Oprah Effect

Oprah’s talk show had a following of 42 Million people.  A virtual no-name could be interviewed on the show, and within just a few minutes of Oprah’s exposure (and approval), their businesses, products, movie, album – even themselves – would instantly be catapulted to big fame and big dollars.

That’s the “Oprah Effect”.

This phenomena was happening with such regularity, and such powerful ripple effects, that a book was literally written called The Oprah Effect (Nancy Mehagian, Judith A. Proffer).

Maybe Oprah’s “Midas Touch” Isn’t Such a Blessing?

Here’s the thing.  A single appearance on Oprah can create a massive spike in sales.

But once that passes through, you’re back to old sales levels, maybe a little higher because you’ve got more credibility from having been on Oprah.

I sure hope that you didn’t buy more equipment or hire more staff to handle the Oprah-orders… because now those staff and equipment are sitting there doing nothing in the post-Oprah days.

Please don’t misunderstand me – I would welcome such a huge spike in sales and the attached notoriety.  That would be amazing.

But to build a business solely on that kind of traffic – traffic that’s non-repeatable – could be disastrous.

What happens when you suddenly need to increase sales?  Are you going to knock on Oprah’s door, hoping she’ll have you back?

Not going to happen.

Flow of Free Customers is Often Unpredictable

Unpredictability becomes a huge issue if you’re trying to make an important forecast.

Maybe you’re trying to:

  • get investors
  • get a bank loan
  • predict staffing and equipment needs
  • plan your exit strategy
  • sell the business

…if you build your business on unpredictable ebbs and flows of customers, where some customers have a high cost of customer acquisition (CPS = Cost Per Sale), and others very low, it makes it very difficult for the investor to assess their risk, and they may say no because of it.

I’m not saying to shun free customers, media attention and publicity, or anything like that.  Not in the least.

All I’m saying is to plan and build your business on paying a competitive price to get new customers.  With a method that is consistent, predictable, and repeatable.

Let the Free customers be a bonus on top of that.

Example of Steady, Repeatable, Buy-able Customers

Think of Google Adwords.

Let’s say you pay $0.50 per click.  You have been tracking your ad performance, as well as your sales numbers.  You can see that it takes 200 clicks for someone to buy your $1,000 product.

So our cost per acquisition is $100.  Then you add the expenses of creating the product, and also add overhead.  Let’s say all that expense comes to $700.  So – on our $1,000 sale – we’re left with $300 left over… that’s our profit for each sale (a margin of 30%).

You want to $100,000 in profit? No problem… just run it through the equation we just established above.

$100,000 profit comes from $333,333 in sales (I’m going to assume the market is big enough to support this level of sales).

$333,333 in sales comes from selling 334 units at $1,000 each.

334 units sold come from 66,800 clicks.

At $0.50 per click, that’s $33,400 in adspend on Google Adwords.

Seeing Into The Future

Isn’t the above example powerful?  Certainly nothing is ever this stable or predictable.  Competitors come and go, products change, that’s life.

But at least we have a clue, based on cold hard facts… not just speculation.

Look at the outstanding advantages:

  • We know we need an ad budget of $33,400 for the year.  Or around $2,785 per month.  We can budget accordingly, accepting – of course – the fact there will be seasonal highs and lows.
  • We know how much it costs to acquire a new client.  IF we ever need to make more (or less) sales – because of unforeseen expenses for example – we know exactly what it’s going to take.
  • We know there will be a steady, consistent flow of customers.  Obviously we need to stay sharp, and on top of changes at Google, as well as in our marketing, but at least there’s a sense of security… not a harsh feast-and-famine rollercoaster.
  • Because we have this steady flow in place, we can plan accordingly for space, equipment, personnel.  Makes growth sustainable.

“One” is the scariest number in Business

One big customer, one source of leads, one single machine.

All terrifying.

If that “one” anything goes down, you’re caught with your pants down, scrambling for a solution… maybe even scrambling for survival.

So I’m not advocating one single source of leads.  The above example of Google Adwords… get multiple lead channels in place, each with the same characterisitics in place:

  • predictability
  • repeatability
  • track-ability
  • split-test-ability
  • able to adjust the flow of customers by modifying adspend
  • overall systemizability

We want to buy customers at a predictable rate and cost.

Specific examples of lead channels that satisfy these characteristics:

  • Google Adwords
  • Direct Response Mail
  • Direct Reponsee Ads
  • Direct Response Media
  • Systemized referral or affiliate program
  • Periodic internal promotions (promos to in-house list)

A solid, complimentary article I recommend you read is this one, about building a Magic Black Box of Marketing.

But I Can’t Afford to Buy Expensive Customers

No Problem.  Do what you need to do.  Get customers any way you need to right now.

But set your sights on the consistent, paid customer… plan to move to that model.

And let all the free stuff be sweet, sweet gravy on top of it all.

Hope that helps,

Tim :)

P.S. The free stuff is great… Oprah’s welcome to call me anytime… just make sure that your growth game plan stays within your own control… using channels that you can count on to deliver leads at a sustainable, predictable rate and cost.

P.P.S.  There are some great ways – using publicity – to get lots of free traffic.  Paul Hartunian is considered a leader in this area.

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