What if there was a way to know exactly how much a customer was worth to your business? Would you know how to put that information to use? By the time you finish this article you’ll not only know the formula for determining a customers’ value, but also how to use the formula to grow your business. Let us begin!
The Formula
First, we’ll start by defining the Lifetime Value of a Customer (LTVC) formula, and then, once that’s understood, I’ll explain it’s benefits and how to use it.
Here is the formula:
- Determine the average amount spent (per ticket) by each customer (an easy way to do this is to look on your credit card merchant statement)
- Subtract your costs
- Answer = “Profit Per Sale” (PPS)
- Multiply your PPS by the number of sales per year
- Answer = “Profit Per Year” (PPY)
- Multiply the PPY times the number of years served
- Answer = LTVC
We’ll now consider how knowing the LTVC helps your business.
How You’ll Benefit
Let’s now look at some of the benefits of having this information available. But first, what if you didn’t have it? What if you don’t know how much your average customer brings in to your business?
Not knowing the LTVC puts you in the position of sheer guesswork when it comes to your marketing decisions. How can you know how much to budget for on a campaign? How do you plan? Do you see the dilemma?
Now, on the other hand, once you know the lifetime value of your average customer it opens up a lot of possibilities.
What It Means
Say that you own a restaurant, and your average (regular) customer spends $30 each time he or she visits, $15 of which is profit. Let’s also say that they visit your restaurant 12 times per year, and, that they stay with you for 2 years on average.
What does this mean? It means your regular customer is worth $15 (profit) x 12 (visits/yr) x 2 years = $360 in profit to your business.
Now, knowing that an average new customer would be worth approximately $180 in profit over the next 12 months – would you be comfortable spending as much as $100 to bring them in the door? Most business owners would.
Here’s an idea…
Instead of putting $500 or $600 a month into a yellow page ad, why not send a letter to your prospective new customer offering him or her a FREE meal (valued at $30 of course) to come in and sample your great food. Better yet, why not send a post card which has a message explaining your offer, and a GIFT CARD with $30 in value loaded on to it?
You could give it a headline something like this: “Whoever said there’s no such thing as a FREE lunch obviously didn’t know about my restaurant”!
A headline like that should have anyone’s attention! Would you agree? You could then follow it up with something like:
“Greetings!
Allow me to introduce myself.
My name is (your name here). I’m the owner of a unique little restaurant you may have seen in the neighborhood, called “Wild Veggies”.
We’d like to get introduced, so come on in and see our menu – it’s unlike anything you’ve seen – which is why I’m absolutely certain you’ll be impressed!
To make this “an offer you can’t refuse” I’ve attached a GIFT CARD valued at $30. Call it a bribe or whatever you want. But if I’m right, and you’re as impressed with our delicious food as I think you’re going to be – then I’m certain you’ll want to keep the card and become a member of our WILD VEGGIE CLUB. I’ll explain all the other benefits when you come in.
Wow, what an offer!!! ‘Whoever said there’s no such thing as a free lunch anyway?’ There is at WILD VEGGIE’S!
We look forward to meeting you. Why not come in today to claim your free meal?”
Very truly yours, _______”
Conclusion
There are so many ideas on how to bring in new business. But before you do… why not begin by discovering the LTV of your typical customer and using it to your advantage?
