Saturday, October 28, 2006

The Entrepreneurs Expected Value (ev) & Customer Service

Poker players understand expected value, too few business people do.

If you watch people on TV play poker, or play poker yourself, you probably understand ev.

Most often it is expressed after a bad beat forces a player out of a game, and he states "well, that's poker," and walks away.

The difference is in business you can plan your bad beats - and your eventual triumph resulting from them.

If you play regular ring poker there will be many times the odds are in your favor, and you will still lose. If you are measuring one game or a nights play - it can look real bad. It can stay bad for a long time before you regress to the norm and things average out. The key is not to look at individual games - but at all the games you will play in your life as one long poker game.

If your odds on winning a hand are 51% and you play it to lose as little as possible if you lose and to win as much as possible if you win - then even if you lose you win. On average, over that one life long poker game.

Businessmen far to often look at each sale as a complete game. Your total product cost is ten dollars, your advertising cost to bring in 10 potential customers is fifteen dollars. If a sale results in a twenty five dollar transaction - how many customers must you convert to reach a profit?

That was a trick question.

In most businesses a current customer is far more likely to re-buy your product, or buy other products, or buy a more expensive product than someone brought in new from advertising.

Your new customer is worth whatever they will buy from you for the rest of their life. Customer service is a profitable life long business game.

It is easy to discover the ev of a poker play. To discover the value of a customer you will have to observe and measure your existing customers. There is obviously hidden value in good customer service, but what is it really worth?

You may find that on average each new customer will buy that same item from you three times a year, and one out of four will buy a seventy five dollar upgrade. Now what were those ads worth, and how many customers do you need to acquire?

You may also find that one out of twenty customers will be in the market for a several thousand dollar back end sale - what kind of customer service will that justify?

Your customer service, customer retention, and consistent customer contacts may be the easiest way to increase your revenues.

Customer service, integrity, and predictable returns are all part of looking at the entrepreneur's ev. An entrepreneur is someone that helps people for profit.

(That is usually much more satisfying than pleasing a boss for profit.)

Most businessmen never get past thinking about that one first sale. In that above question, what kind of profit will you expect in the next year if you convert one potential customer out of twenty into that first sale?

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