The
Lifetime Value Of A Customer Is Crucial To Your
business
What Is A Client Worth To
You?In writing this
article I am assuming that you wish to grow your
business. You realise that your business could be
bigger or better and you want to become bigger and
better. If I am correct then you must calculate the
lifetime value of your customers.
If I am wrong in my assumption, if
you want your business to stay as it is then I
suggest that you stop reading now. If you do not
wish to grow then at best you will waste your time
reading this article and at worst you may find this
idea a little unsettling.
If I am correct in my assumption
then read on.
It is a fact all businesses need to
obtain new customers. Even if you do not wish to
grow your business it will still be essential for
you to replace the customers that you will lose each
year. The loss of customers is unfortunate but is
never the less an unavoidable part of being in
business.
What is a customer worth to your
organisation and why should you care? Do you know
what your average customer is worth to you? Many
people have heard of the concept of life time value
but still do not use it.
Have you calculated the lifetime
value of one of your customers yet?
Most people I ask this question do
not appreciate what the lifetime value of a customer
is or how to calculate it. Many reply that the
calculation is too difficult to do. They do not have
an “average” customer. Of those who do understand
the concept of life time value very few are able to
answer the question.
If you do not know the average
lifetime value of one of your customers I suggest
that you calculate it at your earliest opportunity.
The information may just change the way that you
think about the biggest asset that your business
has.
What Does A Client Cost
You?
Most business owners spend most of
their sales and marketing effort attempting to find
new customers. Unfortunately most business owners do
not take the time to establish how much each new
customer costs to acquire. Do you have any idea what
the cost of a new customer is for your business?
When you last purchased a car did
you enquire about the cost before making a final
decision? I suspect that you did because few of us
are wealthy enough to just go into a car show room
and say “I’ll have that nice blue one over there”
and pay no attention to the cost.
What happened the last time your
husband came home from a round of golf and declared
that he “needed” a new set of golf clubs and he had
seen a lovely set in the golf shop? I suspect that
one of the questions you asked was “and just how
much does a set of Pings cost?”
We invariably want to know the price
of goods that we are going to purchase. Very few
people will make a purchase without giving any
consideration to the price.
Once you allocate a marketing budget
for your business or you hire a salesman you are
automatically spending money in order to purchase a
new customer. If you are going to enquire about the
cost of a new car before you make a final decision
then it must make sense to establish the cost of
acquiring a new customer before you spend the money.
Begin today and calculate how much
each new customer cost you to acquire during the
previous twelve months. Then continue with this
calculation moving forward. Do not be put off by the
notion that the information is difficult to obtain.
If that is the case then put a few new systems in
place and begin to capture the information moving
forward.
How Much
Does A Client Bring In?
How much profit does a customer
bring into your business? Most people would probably
answer in terms of the amount a customer spends with
the business in a year and the amount of gross
profit generated from that turnover.
A more accurate answer is to
consider the life time value of your average
customer. A customer that remains with your business
for ten years will tend to be more valuable than a
customer who only remains with you for one year. The
cost of acquiring new customers will always be more
substantial than the cost of maintaining existing
customers.
In principle the calculation is
easy, however you may require a little time to
gather the information. The calculation is done by
multiply:
The average gross profit on each
order * by the annual frequency of purchase * by the
average number of years a customer remains with you.
You need to establish:
-
how frequently your customers
buy,
-
the average gross profit on each
purchase,
-
the number of years a customer
remains with you.
Gathering the information may
require some work and they may be estimates but you
will find the exercise well worth while.
If you wish to shortcut the process
simply divide your annual turnover by the average
number of customers for the year and multiply that
figure by the average number of years that a
customer remains with you.
Why Bother?
You may find that the value of a
customer is not the £200 order that they have just
placed but the £10,000 they will spend with you over
the lifetime of your relationship.
How do you treat a customer who is
worth £10,000 to your business when compared with a
customer who is worth £200? We all know that each
customer should receive the same high quality
service, but we also know that a high value customer
may well be treated differently.
Will you be able to persuade your
staff to treat customer differently if they
understand the true value of each customer to the
business and their jobs? Will you insist that your
suppliers treat you differently if you explain to
them the lifetime value of your custom to their
business?
How else can use this vital piece of
information? The ultimate goal of course is to keep
that customer loyal to you and your products for ten
years or more. The longer a customer is buying from
you the greater will be their lifetime value. By
offering great value and service these customer can
be enticed to remain forever. Once someone is your
customer they need a reason to leave. The longer
they stay the more products you can sell to them and
the more money you make. Profits are always higher
from repeat customers. Existing customers are always
easier to sell to than new customers are.
Take time to compare the cost of
acquiring a new customer with the average life time
value. Are you spending too much to acquire a
customer or are they coming very cheaply? Do you set
your marketing budget according to how much you
think you can afford, or according to the cost of
acquiring the number of clients you want?
Consider that sometimes you can
afford to lose money on the initial sale in order to
obtain a customer. You can offer something for free,
or add a free gift to the first sale. You could also
try increasing the sales bonus for new customers.
To be perfectly frank this is one of
the reasons I write articles such as this. I realise
many people will have stopped reading before they
reach this point. Many more will read the article
but take no action for various reasons. Some will
read the article and like the ideas but feel that it
is not the right time for them to take action. A few
will read the article, want to take action, want to
know more and will contact me.
If you use the ideas and the
questions in this article you can begin to move your
business forward. Asking the right questions is
often the secret to obtaining the right answers and
being able to progress.
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