The next important concept, is Credit Value.
What you need to determine your credit value is your conversion rate, and customer lifetime value.
The Credit Value will vary drastically depending on the effectiveness of your advertising.
I told you before that I can get 2% conversions, but starting out, you won't reach anywhere near these numbers.
Starting out, it's safe to say you'll get about 0.2% conversions. I know that number is small, but you're just beginning, and 1 conversion is more than no conversions.
So assuming we have that low rate of 0.2% conversions, this means it will take us about 500 credits to get a referral.
The next step is to understand what a referral is worth. This is the customer lifetime value.
This is determined by taking the total number of customers and dividing it by the total revenue.
This is something again that will vary drastically depending on what you are advertising, and how well it converts, but for a lot of free services like this, you can expect a customer lifetime value of around $3.
Ideally it will be better, but $3 is a good base minimum.
This doesn't mean that you will get $3 for every person that signs up, in fact you may get 100 referrals who spend nothing, but then your 101st will spend $300 over their lifetime as a customer.
When it comes to sales, it's important to understand the Pareto Principle, which states basically that 80% of your revenue will come from 20% of your customers.
So don't get frustrated if you start to generate leads and referrals, but don't see any sales. Not everyone is going to buy, in fact most won't, but the secret is to stick to it and focus on those that do.
In fact, I have a website that has over 50,000 members and only 3,000 people have made a purchase. This is less than 6%, yet I have an average lifetime customer value there of about $5.
So when you start out, it will feel like you're treading water and not getting anywhere... it will look like that, too.
But you have to keep in mind the big picture, don't look day after day, but month after month, year after year, and you will begin to see your sales grow exponentially.
Continue to Lesson 5 and we'll put together the Credit Value and Credit Cost to find out if this is really even worth your time.
