This week’s “Ask the Mompreneur” features a question from Melissa Smith Cameron, founder of Asha + Miel Body Care.
Q: I’ve been making scented lotions, bath gels, and the like for nearly 15 years. Everyone who tries the products loves them, so I am trying to get my products into the hands of potential customers. The business is still being funded with my own money, so I’m wondering, are free samples a cost effective way to promote my business?
Who doesn’t love free samples? Allowing potential new customers to try before they buy can be a wonderful way to attract people to your products. After all, Baskin-Robbins built a whole business on this idea!
However, the answer to this question has more levels than you might think. You probably already have an idea of how much it costs to create free samples. This is a fairly straightforward calculation of your ingredients, packaging, labor, and any other direct expenses associated with producing the sample. However, the question of whether or not these costs are effective requires some additional data crunching.
The key concepts here are your customer acquisition strategy, conversion rate, total customer acquisition cost (CAC), and lifetime value of a customer (LTV).
For example, in addition to the cost of the sample, you will also want to consider the time it takes to distribute samples using different strategies, e.g. passing them out on the street versus asking your girlfriends to host Tupperware-style home parties for you. Home parties might also involve other costs, such as refreshments and hostess thank-you gifts. The sum total of costs associated with your customer acquisition strategies is your total customer acquisition costs.
Then we come to a very important number, your conversion rate. You may find that passing them out on the street only leads to 5 sales out of a 100 samples, whereas having your girlfriends host home parties leads to 30 sales out of a 100 samples, a much higher conversion rate. The higher your conversion rate, the lower your per customer acquisition costs, if all of your strategies cost the same amount. The caveat here is that sometimes more efficient strategies also cost more.
And finally, you’ll want to estimate the lifetime value of a customer. On average, how much, how often, and for long does a customer continue to purchase your products after the initial sale? Let’s say that the typical customer continues to buy, on average, $50 worth of products every 3 months for about 3 years after the initial sale, for a total of 12 purchases over the customer lifetime. Let’s also assume you make a 20% profit on your products, or $10 for every $50 purchase. That translates into an LTV of $120 per customer, with each new customer worth approximately $40 in profits their first year.
Now you have a solid foundation for determining whether free samples are a cost effective way to promote your business!
Jennie Wong, Ph.D., is a syndicated business writer, executive coach, and the author of “Ask the Mompreneur: Small Business Advice on Starting and Growing Your Own Company,” available at www.JennieWong.com. Email your entrepreneurship questions to TheJennieWong@gmail.com.