It is all about recognising that a customer is potentially worth a lot more to your business than just the value of the current sale you a making. Satisfied customers are likely to purchase further goods and services and may even act as ambassadors for your business, representing you as a great place to buy.
The old corner grocer was aware of the lifetime value of all his customers, although he probably never sat down and figured it out. He worked very hard to remember his customers and do services for them that would encourage them to keep coming back. He worked every day to increase the lifetime value of his customers.
Once you know the lifetime value of your customer you can use it in planning some of your most important operations:In your marketing strategy – every marketing initiative you undertake has certain costs.
It may also have certain benefits in improved customer relationships, increased sales, and increased retention.
- How much to invest in training your team members to convert one-time customers into repeat customers.
- By segmenting your customers according to lifetime value you can segment you products and services.
- By knowing the lifetime value of your customers, you can more reliably predict your cash flow.
ESTIMATING CUSTOMER LIFETIME VALUE
Just look at how much any particular customer spends with you each month. Let us say it is $500. The value of this customer then is not $500, but $60,000, provided he stays with you for 10 years. If you look at your customer in this light rather than a one off sale, it is more than likely you are going to pay him a lot more attention…in other words you are going to really look after him.
To take this a step further, assuming your gross profit is 40% then this customer is not just worth $200 to you, but $24000, which goes straight to your bottom line. Not only that, if your customer continues to stay with you, because you have really looked after him he has more than likely added $72,000 to the value of your business, when you decide to sell it.
HOW DO YOU ENSURE YOU KEEP YOUR CUSTOMERS?
By providing quality service. This does not cost you a lot of money. Small things can make a huge difference. It can be as simple as sending them thank you notes, or simply by making follow-up telephone calls. Other ways can include improving your team’s performance in delivery, answering telephone calls immediately, or attending to complaints in a way that ensures your customer stays with you.
There are many ways you can follow through on this:
- Ensure your customer is aware of all the products you sell.
- Develop a customer loyalty program.
- Offer gifts for referrals.
- Backing up your sales with guarantees.
- Keep in regular contact by newsletters, social media etc.
Once you know your customers lifetime value, the challenge is to try and increase that value. You can do that by up selling, cross selling and by having them buy off you more often etc.
It pays to have an understanding of the lifetime value of a client. It is worth the effort in spending time to gather the information to enable you to use it to your advantage.
About David Officen
David is the Founder and Managing Director of proCFO. David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.