Quick! What is your most valuable business asset?
If you are like most business people, your mind might quickly fly over
your balance sheet. Is it your equipment? Is it your location? Is it your accounts
receivable?
For most businesses, the most valuable business asset isn't on the balance sheet.
It's their customer list. And those businesses for whom this isn't the most valuable
business asset should change their orientation to make it so.
The hardest, most expensive sale we ever make to a customer is the first one.
In that first, critical, transaction we earn or lose the trust of the customer. Once we
have the trust of the customer, we open the door to many more sales and to referrals,
which most of us agree are the very best new customers to get.
Many businesses frantically work at bringing in new businesses while they
neglect developing the "acre of diamonds" at their doorstep represented by their
customer list.
Why would you want to know the lifetime value of a customer?
The lifetime value of a customer is a measure of the value of the customer to your
business. It is the potential contribution of the customer to your business over a period
of time. When you know the lifetime value of a customer, you have a benchmark for how much
you would or should be willing to invest to acquire a customer.
When you evaluate the effectiveness of your marketing, instead of focusing on the
response ratio (how many responded compared to messages delivered), you should focus on
the return received (number of customers times lifetime value) for the investment made
(campaign cost). Suddenly you find you can justify a much greater promotion investment
when you look at your returns in this way, and this provides the engine for significant
business growth.
Chances are your competitors are too cheap to make the necessary investment,
and this can give you a competitive advantage.
How can you quantify the "lifetime value of a customer"?
Estimate the profit for the transactions you expect to have with the customer over the
period you expect to do business with him or her. If this is an unknown long term, use
five years. You should collect statistics of the transactions done with customers and how
long you keep customers. Also, factor in the benefit for referrals from your customers.
Here's an example:
At a computer software store, customers make average purchases each year of $500. The
average gross profit is 30%. Most customers do business with the store for five years. One
out of three customers refer a new customer.
| Average purchases | $ 500 |
| Years | X 5 |
| Total purchases | $2,500 |
| Gross profit % | X .30 |
| Total gross profit | $750 |
| Add 1/3 gross profit for referrals | $250 |
| Total lifetime value | $1,000 |
If this business invested $1,000 to get a new customer, it would "break even."
Obviously the business wants to make a profit, but now it has a benchmark to work on based
on its own situation. Also, advertising and promotion now represent an investment on which
a return can be measured, instead of just an expense "thrown against the wall."
Try applying this lifetime value approach in your business as a growth strategy.