The greatest asset to your business is your Customer,
specifically, your Customer Lifetime Value.
In my many years in Sales and Marketing, I’ve met many CEOs and
business owners who don’t have much clue as to what Customer
Lifetime Value is, much less its importance and the impact it
has on their bottomline. To most of them, what matters most is
to increase revenue by continuously acquiring new one-shot
customers.
This is one of the fatal mistakes that many business owners make;
it’s a sad scenario, but it’s also the reality. Let me tell you
something: it’ll cost you 5 times more to attract a new customer
than it is to bring one of your past customers back to you.
I don’t know you personally, but if you’re a smart business owner,
you’ll understand that every cent you invest in advertising is
going towards acquiring new customers. You’ll also realise that
once you’ve acquired the customers, you just can’t afford to let
them go.
So what’s Customer Lifetime Value?
Customer Lifetime Value is defined as the total value, in
monetary terms, of your average customers spanning the entire
period that these customers are likely to do business with you.
It’s the potential contribution of your customers to your
business over a period of time.
Here’s how to calculate your Customer Lifetime Value:
1). Let’s say you’ve 2,000 steady customers and these customers
remain with you for an average of two years; for the past two
years, your net profit was $700,000.
The Customer Lifetime Value can be calculated as:
$700,000/2,000 = $350.
What this means is that over an average customer lifespan of
two years, each new customer you could acquire and keep is worth
$350 to you in profits.
2). If you do not have the actual figures, you’ll have to
estimate. As the Customer Lifetime Value will have a significant
impact on your bottomline, my advice is that you be prudent and
conservative in your estimation.
Why is it so important to you and your business?
Lifetime Customer Value is important to you and your business
for the following reasons:
1). Knowing the Lifetime Value of your customers is crucial to
you and your business as it serves as a benchmark without which
you’ll be groping in the dark.
When you know the Lifetime Value of your customers, you can
determine how much time, effort and money you can afford to
invest to acquire that customer in the first instance.
In other words, you can invest more today to reap a much larger
profits later down the road as long as your cashflow is healthy
and can support it.
Every marketing campaign that you undertake costs you money as
well as reaping you benefits such as increased sales, enhanced
corporate image, etc. But how can you be sure that the benefits
would outweigh the costs or investments? This is where knowing
the Customer Lifetime Value is so powerful – it helps you to
determine this even before you launch your marketing campaign.
2). When you realize that customers are actually an ongoing
stream of revenue as opposed to a one-shot sale, you can re-focus
your marketing efforts.
Instead of contantly struggling to acquire more and more new
customers, you can now begin to focus on keeping your existing
customers longer and selling to them repeatedly, in other words,
repeat sales.
You may spend more like making stronger and more attractive
offers than your competition in acquiring new customers now who
will be your money spinners tomorrow.
This makes sense because you now know that on average you’ll more
than make it back over the years that the customers are with you
and therefore you could afford to break even or even lose money
now in acquiring the new customers.
Start shifting your focus to Customer Lifetime Value and maximise your profits today!
Start to have a proper understanding of Customer Lifetime Value
because it’s key to the success of your business. It’ll allow
you to acquire more customers than your competition through
better and more attractive offers; it’ll dramatically increase
your bottomline through more repeat sales and shoot your profits through the roof.
