When considering our marketing budget, most of us look only at how many new customers we believe we must obtain in order to at least break even. What we fail to do is broaden our view to include how one satisfied customer impacts our bottom-line over a number of years. We focus on the short-term rather than the long-term, broader picture.
By looking at the Lifetime Customer Value of each customer, you may realize that instead of needing six new customers each month to pay for your advertising and marketing budget, you really only need two. Not only does the Lifetime Customer Value equation tell you how much each satisfied customer is worth to your business, it also helps you determine how much you should spend to acquire new customers. Additionally, knowing the value of a single customer may also prompt you to swiftly overhaul your customer service policies to ensure that with every transaction you create loyal customers.
And when you’re delivering a great product and/or service, it’s important to remember the five different revenue opportunities each new client represents. These opportunities are:
- initial sale or service – everyday, routine transactions
- up-sells – additional services or purchases that are in addition to the routine transactions
- repeat business – a customer doing business with you repeatedly over time because they like and trust you
- special transactions – significant transactions that are not considered “routine transactions”
- word of mouth referrals – new customers who have been referred by a satisfied and loyal existing customer
To calculate the Lifetime Value of your customers you’ll need the following information:
- the average transaction fee per customer
- the number of times a customer is expected to return to your business each year
- the number of years a customer generally continues to do business with you
- the number and amount of special transactions per year
- how many referrals and the dollar amount of each customer you’ll get from one satisfied customer
Once you have this information, place your own data into the formula calculated below to calculate the Lifetime Customer Value for each of your customers.
When making decisions about your marketing budget and determining how much it costs to acquire new clients versus keeping existing clients, knowing your Lifetime Customer Value is crucial. According to ReachLocal, "having a clear benchmark for your Lifetime Customer Value helps you:
- determine how much to spend to get a new customer
- focus your marketing budget on the most cost-effective tactics
- develop plans to increase repeat business
- create programs to reward customer loyalty
- offer incentives to drive referrals"
When determining your marketing budget and break-even point, keep in mind all the ways a single customer impacts your bottom-line as well as the lifetime value of each customer.
What are some of the changes you’ll be making to your marketing budget and business now that you know the value of each customer?