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.
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