Lifetime Value of Your Customers
How much is a customer or client worth to your business? If you think in terms of today, you might say that the customer is worth what he paid you today. In fact, the value or worth of that individual customer to you and your business occurs over a lifetime. Many customers and clients (and most of us are no exception) return to the same business over and over again to buy what they need or want. You can actually put a value on how much each customer is worth to you.
Until you really know the lifetime value of your customers, it will be difficult to develop the right marketing approach or sales materials. To think about the value a customer brings to your business over a long period of time changes your perspective. For example, if all you are trying to do is ask a customer to buy one product or service from you today, your emphasis will be on short-term factors. You might have a sale or reduce prices for the next 24 hours to give your customers and potential customers an opportunity to buy something today! If you are thinking about the long-term, your emphasis will change. You might spend more time communicating with customers about how important they are to your business and how much you value their business.
Uncovering and estimating the lifetime value of your customers and clients is an important key to unlocking other parts of your marketing and sales efforts. In fact, lifetime value can help you explore things like “an irresistible offer” or explore different ways to get customers into your store.
Let’s take a simple example first. Assume that you have 10 customers. Each customer spends $500 with your company once each year. Maybe this is a service like home carpet cleaning or house painting. For your 10 customers, also assume that each customer stays with your service and buys from you for 5 years. They like the service and value you provide. What would be the “lifetime” value of each individual customer to your business? This value is easy to calculate. For each of your customers, their total value to you and your business is the $500 sale multiplied by 5 years of sales, or $2,500.
The key to using lifetime value estimates and calculations is to recognize that this amount gives you some opportunities to attract, convert and sell to new customers. If you know that each customer is worth $2,500 over their “lifetime”, what would you be willing to do or spend to get a new customer? You can take this estimated lifetime value into consideration as you design irresistible or killer offers to bring in new customers.
Here another example from a recent restaurant business. The value of the typical or “average” customer for this restaurant turns out to be $6,720 over their “lifetime”. Notice that this example also takes into account the value of referrals from the average customer. This is an important point that you must recognize when you estimate the value of your customers.
The estimated lifetime value for the typical customer at this restaurant is a lot more than just the price of the last meal they purchased. What types of offers would you be willing to make to bring in more new customers or re-activate former customers in order to get more of this “lifetime” value? Notice too that we included or adjusted the lifetime calculation by your profit margin. In considering offers to bring in new customers you do need to recognize and account for your expenses. Remember too that we are going through these strategies to help you achieve your overall dividend or profit objective for your business – that you decided on earlier. From a practical perspective, you could actually make offers that have a value up to $6,720 to bring in one new customer and still break even. Realistically, though, it usually does not take an offer value anywhere close to this amount to bring in new customers to your restaurant. Most new customers will come in to try a restaurant for a free single meal, or a buy-one-get-one deal. Or there are numerous other ways to promote your business and bring in new customers for much less than the lifetime value of a typical customer.
This is where your business savvy and expertise come in too. You know your business and competition better than anyone. And, you have probably done some research or searching to find out how your competitors are promoting their businesses. You can take advantage of your business expertise, knowledge of your industry and category, and what you know from the competition to design offers that bring in new customers to help you make that dividend goal.
Things to do for lifetime value