Think in terms of lifetime value
Many businesses don’t understand the concept of lifetime value, preferring to think in terms of the value of each customer transaction. This is a wholly flawed approach. Why? Because once someone has done business with you for the first time, they are more likely to do business with you again in future. This will happen either automatically (e.g. a recurring renewal) or with just a gentle nudge from you (e.g. a renewal or re-purchase). Your cost in acquiring a customer does not have to be fully recouped from their first purchase. Most businesses, if they have a marketing budget, set it without much thought. The lifetime value of a customer gives you a view on what you can afford to spend to bring them through your door. Some examples: Small grocery store: Gross margin 10%. The average customer spends $40 a month and stays loyal for three years. That’s a total turnover of $1,440 per customer. A profit of $144. In theory, the store could spend up to $144 to attract each new customer. Their target is five new customers a month. If they found that distributing 1,000 leaflets at a cost of $200 brought them just five new customers, they would be well in profit! Computer software supplier: Gross margin 40%. The average project brings in $5,000. The average customer has one project each year for three years. That’s $15,000 turnover and $6,000 profit. Their target is just one new customer a month. A $3,000 full-page ad in a trade journal may yield fifteen enquiries, one of which becomes a customer. Once again, the initial sale doesn’t provide the profit needed to pay for the ad. But over three years the investment is fully justified and more. Both examples depend on pulling and converting enough enquiries. We will look at how to do this throughout the site.
1. Calculate the lifetime value of your average customer. You may want to do this for each product or service line you offer. 2. Calculate the effectiveness of your different marketing methods, not just based on the initial return, but the full term of your relationship with the customer. 3. Use the lifetime value worksheets (go to the bottom of the page) to help you.
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