EXPECTED VALUE OF THE INDIVIDUAL
Know these few numbers . . . and you too will make you and your firm a fortune.
Convergence uses simple math to accurately determine the value of a customer. One of the most important variables is the contribution margin to profit. In short, it is how much money you will make after selling something today plus the up-sell or cross-sell over some time period later.
After we take away direct variable cost associated with the initial and follow-up sales, you are left with a most powerful number that tells what the individual is worth now and over time, to drive the convergence marketing machine.
The simple formula is:
Contribution Margin (CM) = Total sales less Cost of Goods Sold (COGS)
I’ll walk you through this simple example. A product sells for $1,000. A normal cost of goods sold (COGS) might be 40 percent or $400 direct variable expense. If you were to take this sum, subtract it from $1,000 actual dollars received, you have $600 from the up-front transaction.
Now suppose that for every $1,000 sale, you could count on each customer purchasing accessories worth $200, at a fixed price that has a COGS of 60 percent Simple math tells us that this would give you additional profits of $80 (60% x $200).
In total, you would have gross sales of $1,200. You had various COGS, but in the end, you netted $600 + $80, for a total of $680 CM for each sale ...