An American dream of sorts goes something like this: I have a great idea for a better widget. I'll build some, then run an ad or drop some direct mail. When the money pours in I'll plow it right back in, running some more ads. Before long I'll be rich without having to put up much more money than my initial advertising and manufacturing costs.
There's something in the fiber of an entrepreneur's soul that makes him susceptible to the dream of a $1 million mail-order idea.
The Facts of Life Dictate against a Front End Success
Years ago you had a good chance of having a front end success because advertising costs were relatively low. Consumers were more responsive because there were not so many people bidding for their money. Today's advertising costs are skyrocketing. The response rates are declining because of the increasing competition for the consumer's attention and a share of his discretionary income.
Most direct response campaigns today simply do not bring in enough money on the first attempt to be profitable at that point. There are exceptions, but they are in the overwhelming minority. Most direct response campaigns lose money on the first step. The first step is simply for "prospecting."
Planning to Get Rich on a One Step Program May Be Disappointing If Not Downright Painful
Why, then, are magazines, e-mail, and mailboxes loaded with direct marketing efforts that look like one step deals? Actually these are recruiting offers designed to find long-term customers for many other products or services sold on the backend.
Let's say, for example, you send out some direct mail and lose $15 for every order you receive. Is that bad? Not necessarily. Not if you have a family of items or services that can be sold and resold to the same customers. In this way the initial losses are simply the price of finding new, qualified customers.
Once You Pay This Cost You Know Money Will Be Made in the Future by Selling More to Those Same Customers
Most large direct marketing firms spend millions of dollars every year on advertising ventures that lose money on the first step, in order to bring in qualified customers who will become profitable in the long run. This takes capital. The early years of direct marketing are cash hungry because you are out to purposely lose money.
As an example you will recognize, what would you say it really costs a record club to buy a high-cost, full-color, advertising space, then offer 8 CDs for only two dollars? The initial loss is very high, losing a substantial amount of money every time an order is received. Yet they know customers recruited at such high costs will become highly profitable as time goes by.
It Is Not Uncommon for Direct Marketers to Wait Months for a Payout on the High Cost of Finding a New Customer
As you can see, relying on backend strategy can have a substantial appetite for cash and time.
There are insurance companies, for instance, who willingly pay the first year of premium in order to recruit a new insured. They know over the years they'll make a substantial profit. It just takes time. Insurance companies have the deep pockets needed to afford this. Other entrepreneurs need a quicker payout.
The most optimistic clients may suspect we have not opened our minds to the true vision of their product's marketability. That is not the case. We constantly look for marketability, but in addition to the client' s optimism we have a clear understanding of the profit cycle inherent to most direct marketing efforts.
We always ask the new direct marketers to pay more attention to backend selling, even if the backend is nothing more than a simple sales brochure that accompanies the original product, and gives the recipient immediate additional buying opportunities. This is called a "bounce back" piece.
If the front end is enormously profitable, does everything the American dream says it should, then there is even more reason to think about the backend. After all, with customers on board, they are a gold mine of pure profits.
Do Not Feel You Must Come up with a Whole Catalog of Million Dollar Ideas
Offer products or services allied to yours, but originating from other companies. You get the profit. You control the marketing. You control the use of your customer base. And you greatly increase profitability.
Think of direct marketing as a sequence of events over the entire lifecycle of a customer. Bank on a long-term relationship with a large group of buyers. As an example, let's create a mainstream business. As you read the following you will see clearly what we mean by backend business.
Let's Create an Imaginary Direct Marketing Business Aimed at Women Who Knit
It is simple. Not faddish. Almost mundane when compared to flashier concepts. But watch.
We start with small ads in publications such as Good Housekeeping, Needle Crafts, and Yankee. They are modest, one eighth page offers for a fantastic bargain – six sets of high quality knitting needles for five dollars. Impossible to turn down. A real steal. So much of a bargain in fact you lose money every time you get an order.
So presume you lose seven dollars on every order, figuring in ad costs and product costs. But we start our backend selling quickly. We send a bounce back sales brochure along with the order that immediately brings in extra cash, without having to wait for a future catalog. This bounce back piece also establishes us as a credible source of more knitting goods.
This Immediate Reorder Opportunity Lessens the Cash Demands Because We Get a Fast Second Wave of Money
The new customers, whether they respond to the bounce back or not, are a treasure trove. We send them catalogs brimming with goods for knitting and sewing. Why sewing when our primary business is knitting? Because we know that the psychographic profile of our customers includes many women who sew.
With the exception of a few proprietary items we manufacture or control – the original product we started with – our catalog is full of things created by other companies. We are, simply, a mail-order store for people with special interests.
We Concentrate on Upselling the Backend
We offer more things, establishing ourselves as a major resource even though we are not the manufacturer for all of them.
Is this as far as it goes? No, in fact we have just begun. It's time to think big. Think marketing. You have corralled a large audience of interested motivated customers. Offer them everything they want.
Why not sell them a newsletter? That's highly profitable. What about seminars, webinars, books, DVDs, and correspondence courses?
Why not add a line of high-end items such as looms, sewing machines, spinning wheels and wool dying tubs drop shipped by their manufacturers? How about group travel opportunities to Europe for a firsthand look at Old World knitting techniques? And so on … and so on.
Yet with all that being offered and bought eagerly, it started with an offer that lost money every time someone said, "Yes!"
Think backend. That's where the big money is. Think beyond your first idea to include many additional levels of selling to the same customers. And make your financial plans accordingly.
|