There’s no question about it. Your existing customers are your most valuable assets. Since they’ve already purchased from you previously, and have experienced the benefits of your products and/or services (and presumably are pleased with those experiences), they are likely to purchase from you again. For sure if given the opportunity, they are likely to refer you to others who may have a need for what you sell.
Yet, nearly every business allot more money, time and effort to the acquisition of new customers than they do to keep their existing customers.
Studies have proven time and time again, that it costs more than five times as much to bring a new customer on board than it does to retain existing customers.
It’s an interesting phenomenon, but most business owners can tell you almost to the penny, what the value of their furniture, fixtures and equipment is, as well as how much money they have tied up in stock and inventory.
Yet, when it comes to the most valuable asset they have… their customers, they don’t have any clue as to what they are worth.
Determining the Lifetime Profit Value of a customer is simple,
it’s the most profitable thing you can do for your business.
If you’ll take a few minutes to work through the numbers, in a very short time, you’ll find yourself light years ahead of your competitors.
That’s right, this one simple exercise can immediately place you ahead of 95% of other businesses who compete against you.
The Lifetime Profit Value of a customer is simply the total profit produced by an average customer over his or her lifetime of doing business with you.
For the sake of example, let’s suppose that the first time someone buys from you, you realized a profit of $100 on the sale. And let’s say, they bought from you three more times during the course of the year, and each time they buy, you realised another $100 profit. That’s $400 in total profits for the first year.
Now, this average customer continues to do business with you for 5 years before their needs change, they move, or switch to another provider.
If they continue to purchase from you at the same frequency and profit level for those next 4 years, you will have realized $2,000 in profits from them during their “lifetime” of doing business with you.
Now, of course these numbers are for illustration purposes only. You’ll have to use your own numbers to come up with a meaningful figure for the lifetime value of your own customers.
So, what does all this mean? Well, if you know how much your average customer is worth to you over the course of their lifetime, you gain several advantages over your competition.
For instance, if you know your average customer is worth $2,000 over the course of their association with you, you know how much you can afford to spend to keep that customer happy and coming back for more. This way, you’ll also know how much you can afford to spend to acquire a new customer.
For example, your competitors are using a direct mail approach to contact their prospects. And if they’re like most people who use direct mail, they only send one introductory letter with one or two follow-up letters.
If they don’t get a response, they stop contacting that prospect and move on to another. But now you, knowing that the Lifetime Profit Value of your average customer is $2,000 (in our previous example), know that you can spend up to $2,000 to acquire that customer and still break even.
Not that you have to spend that much, but look at the leverage and advantage you have over your competitors, just by knowing what your numbers are.
But that’s not all. Let’s suppose that you give really great service (you do, don’t you?), and that your customers are thrilled enough with it to tell their friends about you.
What is the cost to you to acquire those friends as customers? They come on board as pure profit to you… no marketing costs, whatsoever.
So, what should your marketing budget be?
Some businesses use a percentage of sales. Others use a fixed dollar figure. But think about it another way.
As long as you’re making a profit, why set a limit on your marketing budget? Instead…
Spend whatever you can afford so long as the acquisition costs are less than the profits you make on your average customer.
The only limiting factor should be your cash flow. As you increase your customer base and your profits, increase your budget as well. Figuring out exactly what your average customer is worth to you (their sales plus the profits on any referrals they give), can be one of the most important things you can do.
Take a minute and put your figures in the accompanying tables. You’ll see just how valuable each of your customers is.
Below, is a table titled, “Restaurant Example.” This table is an illustration of how the Lifetime Profit Value can be determined for a restaurant, and is included to give you an idea of how you the table is to be used.
A. Amount of average sale $ 50
B. No. of sales/year/customer (2 x per month) 24
C. No. of years customer patronizes restaurant 10
D. No. of referrals from customer 10
E. % of referrals who become a customer 50 %
F. Gross income per year per customer (A x B) $ 1,200
G. Gross income over buying lifetime (F x C) $ 12,000
H. Referrals who become customers (D x E) 5
I. Gross income from referrals (G x H) $ 60,000
Total value of a loyal customer (G + I)
Following the Restaurant Example we have two additional tables that you can use to determine the LPV of your own customers or clients. Email us and request them - Don’t pass these tables up – seriously – they are Super Valuable! One condition though - make sure you take the time to complete them.
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