What You May Spend

Dear friend,

The riddle first, as ever. Your century today, and the subject is an auction you are already bidding in, whether or not anyone has told you the rules.

Two firms both chase the selfsame trade,
Both count the cost of what they've paid.
One stops at what the first sale brings,
One knows what all the years will bring.
Same market, and the same one wins.
What did he count that she did not?

Hold your answer. Story time.

The Story

Two firms in the same trade, chasing the same customers, and the work, all together now, was equally good. Both advertised. Both were sensible people who watched their money carefully, which is what makes the ending of this one worth sitting with.

The first had a rule, and she thought it a prudent one. A first job brought in about two hundred pounds, of which perhaps eighty was profit, so she would not spend more than eighty pounds to win a customer, and preferred to spend forty. Anything above that struck her as buying trade at a loss, which sounds like the sort of thing a careful business avoids.

What she never counted was what happened after the first job. Most of her customers came back. Some came back four or five times, some sent a neighbour, and a fair number took the maintenance work eventually. Over four years the average customer was worth something over a thousand pounds to her, and she could have told you that had anyone asked, but nobody had, and it had never once entered into a decision about advertising.

So she bid forty pounds for a customer worth a thousand, and lost, week after week, to a rival she assumed had deeper pockets or lower standards.

He had neither. He had done the arithmetic she had not.

He knew his customer was worth about a thousand over four years, so he was content to spend two hundred and fifty to win one, which meant losing fifty pounds on the first job and being perfectly cheerful about it. That single figure changed what he could do. He could pay for the better placements she was outbid on, answer within the hour because it was worth staffing for, take the first job at a keen price, and send a real sample by post to anybody who asked.

Every one of those looked, to her, like extravagance or luck. Each was simply a purchase he could afford and she could not, and he could afford it because he was buying with a four-year figure while she was buying with a Tuesday one.

Two things kept him honest, and they matter more than the boldness. He knew the number rather than hoping at it, having gone through four years of his own books to work out what a customer actually did over time. And he watched the cash, because a business can be profitable over four years and still fail in March, which is the trap this thinking sets for the incautious. He never spent more than he could stand to be out of pocket at once.

By the third year he had most of the trade, and his rival had concluded the market was too competitive to advertise in.

The Lesson, Since You've Earned It

You are bidding against everyone else in your trade for the same customers, and the ceiling on your bid is set by the only number you have not calculated. Not your cleverness, not your budget, not your patience: what a customer is worth to you over their whole life with you. The firm that knows that figure can outspend, outwait and outwork the firm that does not, using the same money, because it is spending against a different total.

And notice the shape of the mistake, since it is the opposite of reckless. It is caution, applied to the wrong figure. Judging an advertisement by whether the first sale covers it is exactly as sensible as judging a shop by whether the first customer through the door pays the year's rent. It feels rigorous. It quietly caps your business at whatever can be won cheaply, which is the least valuable trade in any market.

This is the farrier's lesson turned into a decision. He told you what a customer is worth over forty shoes; the question here is what that permits you to do on the Tuesday you are choosing whether to spend. And it is why the second rung matters so much in practice: every additional thing a customer can buy from you raises the ceiling on what you may spend to find them in the first place.

Two warnings, both earned. Work the number out from your own books rather than from optimism, because an invented lifetime value will let you spend real money against imaginary income, and the arithmetic is unforgiving in only one direction. And keep the cash question separate from the profit question: a customer worth a thousand over four years does not help you pay wages in six weeks. Spend what you can be out of pocket by, and no more, however good the four-year figure looks.

Three questions, and open the books for the first one:

1. What is a customer worth to you over four years? Take a group who first bought three or four years ago and add up everything they have spent since, then divide. Not a guess: the actual total. Most trades find it is several times the first sale, and most have never once looked.
2. What are you currently willing to spend to win one? Whatever that figure is, notice which number it was derived from. If it came from the first job, you have been setting your ceiling with a fraction of the truth and calling it discipline.
3. What could you do at three times your current limit? List the things you have rejected as too expensive: the better placement, the sample sent by post, the person answering the telephone within the hour, the keen price on a first job. Those are not luxuries. They are the things your competitor is already buying with the same margin you have.

The Answer to the Riddle

What did he count that she did not?

Everything after the first sale. They had the same customers available, the same margins, and the same money in the bank; he was simply bidding with a four-year figure and she with a single job, so he could pay two hundred and fifty for a thing she valued at forty. She was not outspent by a richer firm. She was outspent by a firm that had spent an afternoon with its own books, and every year she declined to do that arithmetic, she raised his profits a little further.

The verse:

The first sale is a single stone,
Not the whole wall, nor yet the home.
Count all the years they'll be your trade,
And see what you can rightly paid.

Until next time. Go and work out what a customer has actually been worth to you over four years, and set your limit from that number instead of the first invoice.

P.S. If the four-year figure turns out to be barely more than the first sale, that is the most valuable finding in this letter, and it is not a reason to spend less. It is a report that your business has one door and no rooms beyond it, and the fix is a second rung rather than a smaller advertisement.

Also in the archive: The Farrier's Fortieth Shoe, The Ad That Worked and Twenty Strangers.