How can this help your business? Read on…
After World War II there was food rationing here in Britain.
Because I’m 365 years old I remember it well: there was a huge black market, often in very dodgy products, as this story reveals.
A man sold a case of tinned sardines to another man. That man sold it for more to another man.
He sold it on at a profit. So did the man who bought it.
That man opened one of the tins. The sardines were disgusting. He opened a second. Just as bad. And a third. Also foul.
He rang the man he’d bought it from to complain.
“Why did you open them? They’re for buying and selling, not eating” was the reply.
I was reminded of this when considering Jeff Bezos, now the world’s richest man. Amazon has now been going for 20 years. Its shares have been bought and sold, going up in value year after year.
But according to an article in Money Week Amazon has never made a real profit. Two Wall Street experts have analysed its accounts and the central business – retail – has never made a real profit. The true state of affairs is disguised in sundry ways.
How can a business that makes no money be worth so much?
It is a miracle, based on what? Belief, not profit.
Do you think this is a sound basis for valuation?
It reminds me of the great Dutch Tulip craze – described in an excellent book “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay.
Written in 1842, it’s still one of the best analyses of folly I can recall. People invest because other people invest. Share value keeps going up based on belief, not reality.
But it also reminds me how you should invest in your marketing.
Many people believe if you don’t make an immediate profit from every sale, advertising doesn’t pay.
That’s because they don’t understand customer value.
If you do a good job your customers don’t just buy once – they keep coming back.
So you need to keep an eye on long term customer value – how much profit you make after all expenses from your average customer.
Then you can decide what you are willing to invest in acquiring a customer.
The longer people stay with you, the better your business.
If you take my AskDrayton offering, people stay for an average of 9 – 10 months, which is – I am told by someone far richer than me – about double the average for its category.
It determines what I am willing to pay to get a new subscriber. I am no mathematician but 20 years without a profit would worry the hell out of me.