According to Jay Abraham, the concept of marginal net worth is the total aggregate profit of an average customer over the lifetime of his/her patronage – including all residual sales – less all advertising, marketing, and product or service fulfillment expenses.
Let’s assume the average new customer coming in your front door brings you an average profit of $75 on the first sale. He/she repurchases three more times a year, with an average reorder amount of $300, and on each $300 reorder you make $150 gross profit.
Now, with the average patronage life lasting two years, every new customer is worth $975.
I arrived at the $975 by adding the $75 initial profit to the three additional purchases per year (at $150 profit per purchase) times the two years they remain a customer.
So here are the steps to follow to calculate your marginal net worth:
Step 1: Calculate your average sale and your average profit per sale.
Step 2: Compute how much additional profit a customer is worth to you by determining how many times he or she comes back. Be conservative.
Step 3: Compute precisely what a customer costs by dividing your marketing budget by the number of customers it produces.
Step 4: Compute the cost of a prospect the same way.
Step 5: Compute how many sales you get for so many prospects (that’s the percentage of prospects who become customers).
Step 6: Compute the marginal net worth of a customer by subtracting the cost to produce (or convert) a customer from the profit you expect to earn from a customer over the lifetime of patronage.