|Three guys walk into a pizza joint...
No, it's not the start of a joke, although the joke may
be on the owner of the pizza business if she doesn't
understand the concept of "lifetime value of a
If you do not know what your average customer is worth
over the lifetime of the relationship, you are missing a
valuable piece of the marketing puzzle, and it will cost you
BIG TIME in lost sales and profits.
If the owner of the above pizza business doesn't know the
lifetime value of those three guys, then she can't know how
much she should spend to acquire and keep them as customers.
DO YOU KNOW THE LIFETIME VALUE OF YOUR CUSTOMERS?
And...this is NOT some sort of FUZZY math. If you know
your business you can calculate the lifetime value of a
customer quite easily.
Once calculated, you will find that the dollar amount you
arrive at will most likely surprise you...and quite possibly
enlighten you. Once known, it opens up a whole new view
regarding how to market and manage your business. It DOES
NOT matter what type of business your are in. A pizza
restaurant, a dental office, a plumbing company - every type
of business can capitalize on knowing the true lifetime
value of its customers.
So...just what exactly does "lifetime value of your
customer" mean. Simply the total contribution to
overhead over the entire life of the relationship between
you and your customer. It includes NOT ONLY the initial
sale, but all other residual sales less the product/service
costs and the advertising/marketing expenditures.
Let's say the average customer that walks through your
front door or visits your website and then purchases from you is
worth on average $150.00 for the first sale. That is NOT the
number that means anything. If you are marketing your
business correctly, you have established a relationship with
that customer that will continue over to other sales. In
this example, let's say the average subsequent sale is
$100.00 and the average customer makes another 8 sales. That
means that every new customer to you is worth $950.00 in
sales dollars. If you product/service cost is $350.00, then
your gross profit per new customer is $600.00.
How much does it cost in advertising/marketing dollars to
bring that new customer in? If it less than $600.00 then you
theoretically break even (we know...there's overhead costs
too). Most business owners won't conceive of spending
even the initial sales amount of $150.00 in
advertising/marketing costs to acquire the customer. But if
you know that that customer is worth $600.00 to you over the
relationship lifetime, how much would you be willing to
spend to get that customer. If you have even a modest amount
of capital, you should be spending at least $150.00 to make
that customer yours. Yes, your goal is to leverage your
marketing to ultimately reduce the amount you spend to
acquire customers, but your other goal is to create a
marketing program that acquires as many customers as
possible in a profitable manner.
Knowing what the true lifetime value of a customer is
allows you to plan your marketing accordingly. Not knowing
it means you are marketing blindly. Another advantage...most
if not all of your competitors don't know about this
concept, and you can and certainly should take advantage of
Another interesting note...in a recessionary period,
those that do not know the lifetime value of their customers
will not market as they should - they will actually cut back
their marketing. The fact is that during a down turn in the
economy it is easier to acquire their customers from them,
and if you perform as you should, they will be yours and
will never go back to your competition.
Add another marketing concept called "back-end
selling" to "lifetime value of a
customer" and you can easily double the actual
total lifetime value of each customer.
We can not only help you understand how these two (and
other) marketing philosophies can work together to create
massive growth in your sales, but also how to implement