|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
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
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
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.