In the summer of 1981, 16-year-old Chris Zane landed his first job in a local bike store in New Haven, Connecticut. For an avid cyclist like Zane, it seemed like the dream gig—but the reality was a little different. The U.S. economy was stuck in a deep recession, interest rates were up over 20% and the public showed little interest in spending what money they had on bicycles. Times were tough and business was slow.
At the end of the summer, the store’s owner decided to cut his losses, close the business and lay off all his staff, including Zane. But Zane had other ideas. He borrowed $23,000 from his grandfather, purchased the failing bike store and renamed it Zane’s Cycles. Over the next 30 years, Zane would grow his business into the most successful bike store in the state.
One Small Loan, One Big Dream
Zane’s success was built on the generosity and belief of his grandfather. When the bike store he worked for folded, he went to his parents for money to buy it but they didn’t have that kind of cash. Instead, they encouraged Zane to ask his grandfather.
“I went to my grandfather and I asked if I could borrow $23,000 to buy out the inventory and take over the lease,” Zane told My Quest for the Best. “He said he’d lend it to me but I had to pay him the same interest rate he was collecting on his Money Market account. At the time, that was 15 percent.” Zane’s parents approved the loan on one condition: he would repay the loan with 15 percent interest, even if his new business failed.
That small loan allowed Zane to open Zane’s Cycles in 1981 but it didn’t guarantee him success. Zane’s Cycles had a handful of rival stores locally, and a raft of bigger national competitors, all of which had one thing in common — each was bigger than his fledgling business. His larger competitors leveraged their size to secure unbeatable prices on bikes and parts. “I couldn’t compete on price because the other bike shops were larger,” Zane told podcaster Zane Safrit in 2011. But it wasn’t just price. They also had bigger marketing budgets, bigger advertising budgets and bigger staffing budgets.
Standing Out from the Competition, for Life
For a few years, Zane struggled to work out how he could compete with his competitors, and then it hit him. “I realized service-offerings were the most important things we had to provide to our customers,” he told Safrit. So Zane started looking around at what his competitors were doing. Most offered paltry 30-day tuneups. “You buy a bike; you bring it back in 30 days; they tweak it to make sure everything is working correctly. And they send you on your way,” Zane told Safrit. If anything broke after that, they’d charge upwards of $100 an hour for labor.”
“[W]e looked at [the competition] and said, ‘Okay, we’ll throw in a year’s worth of free service,’” explained Zane. “Because if we build our bikes correctly, they’re not going to need a lot of service for the first year.” After seeing Zane’s year-long guarantee, customers started pouring in. The bet had paid off but his success would be short-lived. Zane’s competitors saw their market share falling and quickly extended their guarantees to match.
This is where Zane’s story gets exciting. Around this time, Zane started reading about customer lifetime value (LTV), which is the total amount a customer will spend at your business over the course of their life. Here’s how it works: The average Starbucks customer spends about $5.90 each time they visit a Starbucks and they visit, on average, 4.2 times per week. So every week the average customer spends $24.30. If the average customer keeps buying coffee at this rate for the next 20 years, they’ll spend $25,272 — a huge sum of money.
Zane replicated this process with his own customers. If a customer stuck with Zane’s Cycles for their entire life, they’d buy a training bike at eight years old, a bigger bike at twelve, something cool for college at 20 and a sporty road bike for their midlife crisis at 40. “We said, ‘If they’re going to buy all of their bikes from us, we’re going to capture $12,500 in business from them,’” Zane told Safrit. With a 45 percent profit margin, each customer would earn the business $5,600 in gross profit.
That gross profit figure was a game-changer. He stopped caring about short-term profits and doubled down on building lifetime relationships. With his mindset flipped, Zane looked at his one year guarantee and knew it wasn’t enough. If he wanted customers for a lifetime, he needed to offer a lifetime guarantee. So that’s what he did.
Alongside his lifetime service guarantee, Zane delights his customers in a huge variety of ways. He serves free coffee from his espresso bar and gives customers complimentary water bottles with gift certificates. He refuses to charge for parts that cost less than one dollar and includes a free toolkit with new bikes. Each little extra costs the business a couple of dollars but it solidifies the relationship with his customers and they stay with him for decades.
Zane’s lifetime service guarantee drove astonishing growth in his business. “By focusing on the lifetime value of each customer and delivering an exceptional experience, we are able [to] capture 100% of our customer’s lifetime value,” Zane wrote in Forbes in 2011. Since introducing his lifetime service guarantee, Zane’s Cycles has grown by 23% every year. “Today, Zane’s Cycles generates more than $20 million in revenue and has an army of delighted customers.”
Investing in the Future of Your Small Business
Zane recommends all small business owners follow his lead and weigh up smaller transactions against the lifetime value of a customer. “Why ostracize someone over one or two things that might cost us money when understanding the lifetime value gives us the ability to justify it?” he said in an interview with Inc.
Business owners can learn a lot from Zane, even if they don’t implement a 100% lifetime guarantee. By calculating the lifetime value of your customers, you can understand what someone is actually worth to your business and, therefore, what you can invest back in them.
And what of that loan from his grandfather? With customers flocking to take advantage of Zane’s lifetime service guarantee, Zane’s Cycles grew incredibly quickly and generated more than enough profit to pay back his grandfather within five years.
Image Credits
Feature Image: Unsplash / Jonny Kennaugh
Image 1-2: via Zane’s Cycles
