Knowing How Much Each Of Your Customers Are Worth Can Give You A Tremendous Advantage
Let’s talk for a minute about something that every business owner, every manager and every entrepreneur needs to know to gain an advantage over their competition.
It’s simply this: Determine the Lifetime Profit Value of your customers.
Here’s what it means:
How much money… how much profit will you realize from each of your customers, over their “buying lifetime” with you?
This is such an important concept, and I can’t say it strongly enough, that just knowing and understanding this one thing can have a bigger impact on your business than just about anything else you can do.
And, it will bring a whole new set of factors into play and can absolutely change the way you look at your business… the way you do business… and the profits you’ll generate as a result.
Let me give you an example to explain what I mean: Let’s say that your average customer buys from you three times a year. And let’s say that after you pay for the cost of goods, overhead, commissions and salaries, you end up with a net profit of $50 on each sale. That $50 three times a year, nets you $150 in profits for the year.
And let’s say that that customer does business with you on average for 5 years.
Over that 5 year period (or their “lifetime” of doing business with you), that average customer has been worth $750 in profits to you.
Now, let’s expand this example to a theoretical base of 1,000 customers and see how this can pay off. Those 1,000 customers at $150 a year nets you an annual profit of $150,000.
Now, let’s assume that with the proper programs in place, that you’re able to increase each of the 4 ways to grow your business that we discussed by only 10 percent. Here’s what happens:
First, the number of customers you have increases from 1,000 to 1,100.
Next, the average profit from each customer increases from $50 per year to $55.
Third, the average number of purchases per customer increases from 3 times a year to 3.3 times.
So, the annual profit from your client base will increase from $150,000 to $199,650. That’s an increase of nearly $50,000 a year…or 33.1 percent!
That’s a big increase! But if you think that’s exciting, wait till you see what happens if you were to extend your customers buying lifetime by just 10 percent.
Let’s say that your customers stay with you for 5 years, on average. Your lifetime value from those customers over that period of time would be $750,000.
But, if you can extend that 5 years by just 10 percent to 5 ½ years, your total dollar value from these customers will increase from $750,000 to $1,098,075! An increase of $348,075… or 46.4 percent!
That’s a major increase!
But that’s not all. Let’s say that you put an effective referral generating system in place and that just 10 percent of your 1,000 customers sends you a referral with a buying profile the same as your average customer. Now, that’s an additional 100 customers who will bring you profits of another $99,825 over the 5 ½ years.
Total it all up and you just made an additional $1,197,900!
Sound impossible? Well, it’s not. And it’s not all that difficult, either. And it can be done by simply increasing each of the four areas by only 10 percent!
Knowing And Then Applying The Lifetime Profit Value Of Your Clients Is One Of The Most Profitable Things You Can Do In Your Business
Now, how hard would that be to do in your business?
Could you realistically, and with some help, increase each of the four areas we discussed by ten percent? What about twenty percent?
Now, maybe the numbers and figures I’ve discussed are realistic for you and your business and maybe they’re not. And maybe you can’t increase each of the areas by the same percentage.
That’s okay. It doesn’t matter. The point is you probably have room for improvement in one or more of the four areas. And if you want your business to be a viable force in the marketplace and to give you the lifestyle, the satisfaction and the income you want you’re going to have to take some proactive steps.
And as I mentioned before just knowing how much your customers are worth to you can be invaluable and can help you in several ways.
First of all, we know that people don’t do business with the same company, firm, store or organization forever. They stop doing business or change whom they do business with for a variety of reasons.
But, if you just know, for instance, that your typical customer stays with you for say, five years on average… that they’re not just a one or two-time sale… you may begin to treat them differently.
You may treat them with more respect, more kindness, more courtesy. You may give them some form of special treatment. And you may even invite them to special, invitation-only preferred customer sales or events.
In other words, once you begin to see your customers in a different light you may begin to do things differently in order to get them to stay longer as customers.
Next, if you know what the Lifetime Profit Value of your customer is you’ll probably discover that you can spend far more to acquire a new customer than you originally thought.
In other words, if your average customer is worth $750 in profits to you, you can, theoretically, afford to spend up to $750 to bring in a new customer and still break even.
Now, if you have additional products or services you can sell your customers that you’re not now selling, or if you can arrange joint ventures with other businesses who have complementary, but non-competing products that you can make available, you can spend that same $750 and make a profit on the other products.
And, if you put an effective referral-generating program in place, you can spend that same $750, and make your profits on the referrals they generate.
Now you and I both know that it’s unrealistic to think that you can really afford to spend the full amount of your lifetime profits (in this case, $750), to get each new customer. And I’m certainly not suggesting that.
In reality, you can’t spend the entire $750. You’ve got to be concerned about things like cash-flow and reserves… you can’t spend money you don’t have.
And, you have to make sure that the customers you attract, at least match the profile of your average customer, or perhaps are even a little better than average.
There are a number of other things that you need to be aware of, as well, such as “Cost of Acquisition,” “Cost of Retention,” understanding your margins, and calculating the Marginal Net Worth of your customers. Unfortunately, we don’t have time to cover them in sufficient detail, here.
When You Know How Much You Can Afford To Spend To Acquire Or Keep A Customer, Your Competitors Don’t Stand A Chance
What it really comes down to, are two questions: How much can you afford to spend, and how much are you willing to spend to attract new business?
You may find that you can and are willing to spend five or six times what your competitors spend. And if they’re not willing to keep up with you, your business may just explode and leave them in the dust.
Just knowing what your margins are and that you could, if you had to, spend up to that $750 amount and still break even, gives you a tremendous edge over your competition.
Here’s an example: My wife and I have a favorite restaurant we like to go to about twice a month. And our meals typically come to about $30. So $30 times 24 meals adds up to $720 in gross sales for the year.
Now let’s suppose that we continue to patronize that restaurant for, say, 10 years. That’s our buying lifetime with that particular restaurant. That gives the restaurant a total of $7,200 in sales.
Now, if over that 10 year period, we refer five people (and that’s not very many in 10 years), who have spending patterns similar to ours, they’ll spend an additional $36,000. (That’s 5 people times $7,200 a year.) Add that to the $7,200 that we spent, and we’ve been responsible for generating $43,200 for that restaurant.
Even after deducting expenses for overhead, salaries and food costs, the restaurant still realizes a pretty substantial number of profit dollars from the efforts of just one couple.
Now, here’s a question: Could that restaurant afford to give away a free meal to attract a new customer? Keep in mind that two of us are spending $30, so one meal costs $15, and out of that, about a third of it (or, maybe $5) is profit. So, the meal really only costs the restaurant $10, and only part of that $10 goes to cover the cost of the food. The rest of the expense is in overhead, which would have to be paid whether or not a meal was served.
Well, of course the answer is yes, they can afford to give away a free meal. Or at least a free appetizer or desert. Not only that, but they can afford to do a number of other things to not only attract new customers, but more important, make their existing customers feel more appreciated and more special.
And you know when someone feels noticed and important… appreciated and special… it’s just natural that they’ll want to return.
Let’s imagine, for a minute, that you are a long-time, faithful customer of a certain restaurant. And you brought your family, your clients or your business associates with you to eat there on a regular basis. How would you feel, if sometime the manager of the restaurant were to offer you and your party a free dessert as a special appreciation gift for your loyalty and for the extra business that you brought them? Do you think that little display of appreciation would cause you to want to return again? It probably would.
And what about the people who were with you? How do you think they would they feel? Do you think they would want to go back to that restaurant?
Sure they would. And, what do you think the restaurant’s hard costs of those desserts would be? Do you think the restaurant would lose any money on that gesture?
Well, it’s not likely. You see, once you know how much profit your customers are worth to you, long term… then, and only then, can you determine how much you can afford to give away or to spend to get new customers or to keep your existing customers coming back. And you can begin to experiment with different offers to see which ones work best.
Now, here’s another thought. Let’s say that the owner of that restaurant runs an ad or does an email campaign to attract new customers.
And let’s say she spends $1,000 for the ad or the campaign and two couples come in for dinner and each spends $30.
Well, she’s taken in a total of $60, but the ad costs were $1,000. So what does she do? What would his competition do? Does she consider the ad or email campaign a loser… a total bust… and stop running it?
That’s what most business people do.
But what about you? What would you do? Well, if you understand the concept of Lifetime Profit Value and Marginal Net Worth you’ll probably think differently.
When you consider the Lifetime Value of those customers, and realize that with the proper care and attention those customers could be responsible for $43,200 each… or $86,400 for the two couples… it completely changes the picture.
Now, of course, those are gross revenue figures and you have to deduct for expenses. And it’s over a 10 year period. But, still, that represents a significant amount of money… and all from a $1,000 ad… an ad that most business owners would have given up on.
Now, I’m not saying that you have to settle for, and be happy with low response rates for your ads. Certainly, you don’t.
You should always try to improve your ads, your offers, and give good, compelling reasons and benefits for someone to do business with you.
But let’s go back and think about our restaurant example. Did this idea of stopping an ad just because it didn’t break even or produce a profit for you sound unusual? Different? Strange?
Well, maybe to some people in some businesses. But supermarkets and department stores use their own adaptation of this technique all the time. You’ve probably heard it referred to as a “loss leader.”
What they do is advertise a few products at or below cost to bring new customers in to their store knowing that the customer will usually buy more products once they’re in the store.
And also knowing that unless they get someone to visit their store in the first place, they could never stand a chance of making additional or repeat sales or getting referrals. Additional and repeat sales to existing customers are generally easier to make and usually always bring higher profit margins.
Just remember this important point: The first sale means nothing… unless you’re planning on going out of business next week. You’ve got to consider the Lifetime Profit Value… what your customer is worth to you, if you really want to be successful.
Calculating The Lifetime Profit Value Of Your Customers
Now, what about you in your business? How can you apply this concept of Lifetime Profit Value?
Well, the first thing you can do is determine what the amount of your average sale per customer is.
Then subtract out the hard costs so you’re left with the profits from that sale.
Then multiply that amount by the number of sales you make to your average customer during the year.
And finally, multiply that amount by the average number of years your customers do business with you.
The number you have left, then, will be the Lifetime Profit Value of your customers.
Now, if you add the profits you make on any referrals they send your way their value to you will automatically increase by the amount of those profits.
Now, the next thing you can do is begin to find ways you can increase the value you provide your customers so they’ll want to spend more with you, buy more often, stay with you longer, and bring others to do business with you.