Understanding the lifetime value of a customer
When I am consulting with business owners, one of the most important topics I like to discuss is the lifetime value of a customer. This is absolutely one of the most critical keys to managing and growing a business. Yet as important as it is, it is rare that a local business owner can ever give me a number, and most have never even given serious thought to the concept.
It is in some ways understandable. For example, people become plumbers, hair stylists, massage therapists, doctors, attorneys, etc. because they like those fields. And while these people may be the very best at what they do, the fact is most never give serious thought to an in-depth study of the marketing side of business.
It is undeniable that businesses that are able to understand and measure the lifetime value of their customers will have a significant advantage over businesses that ignore this crucial business metric. So, let's take a look at an example so that you can get started with examining the lifetime value of your customers.
By now you are thinking, "enough of the abstract concepts, show me the money!" Well, let's use a very conservative example. Let's use a massage therapist as an example. I spoke to one that said she had an ad in the phone book that cost her thousands of dollars a year and she only received about 4 customers a year because she worked in a smaller city. For that reason, she didn't see the need to have a website. Her logic was that she would still probably get only 4 customers a year, and even at just $25 a month to have a website, the cost just wasn't justified.
So, this is where we discuss the true value of a customer. I explain that if she does only get 4 customers a year, and she does a great job at a fair price, and just 1 of those 4 becomes a regular customer, she could make at least $1400 from that customer. The therapist said that a regular customer will visit on average of at least once every 3 months, quite often they will visit more but we need to be conservative. She also said that her tip was between $10 and $20 from good customers. so if she charges $60 an hour and gets just a $10 tip, that is $70 a visit.
Now that we have the revenue per visit, and the frequency of visits, it is easy to calculate minimal revenues of $280 a year. If the customer is receiving great service at a fair price they will keep coming back year after year. So over the course of 5 years, the customer is worth $1400 in revenues. If she makes all 4 new customers regular customers, then the numbers grow much higher.
When you are able to assign a value to a customer, suddenly the $25 a month, looks cheap. Keep in mind that every city and every business type will have different projected numbers of customers and different costs of effectively marketing to that customer base. But the formula is always the same - projected revenue x number of service opportunities x length of customer retention.
It is only after you take the time to calculate the true value of your customers that you can plan out a cost-effective marketing plan to reach those customers!
If you would like to discuss your specific business and devise a cost-effective online marketing strategy, give me a call. I am always happy to help!