Lifetime Value: The Secret to Success in Marketing.

25 May

man sitting in a limousine

How Much Are You Worth?

Your fifth grade teacher may have one answer and your stock broker another. But as a marketer, knowing your customers worth (known as a customer’s lifetime value) is essential in developing or implementing a marketing plan.

So, what are you worth, to say, your favorite clothing store or restaurant?

My favorite pizza joint was “Antonios”. Before it went out of business, I ate there on average, once a week.

If you had asked Antonio what I was worth, he would have looked at you oddly, and said, “$24.95”. That was the cost of a large pie with the works.

What Antonio did not factor in, is customer lifetime value.

If he had, he would have known I was worth about $6,500, and I may have gotten the respect I deserved… and he may have still been in business.

If you know the lifetime value of your customers, you will have a better idea on how much you can afford to spend to acquire them.

Determining a Customer’s Lifetime Value

Multiply your customers’ average purchase by how often they do business with you. Then subtract your hard costs and multiply that by how long you think you will have them as a customer.

You can access this data from you customer database. If you don’t have a customer database, get one!

For now, figure your repeat customers will do business with you, for three to five years, if you are a service business, and seven years if you are a retail business.

Lifetime Value of a Homeowner with Weeds

As an example, you are a gardener and charge $100 per visit. You come every other week to mow, weed, trim the hedges and blow leaves and dirt from one side of the yard to the other.

Your average customer stays with you 5 years. Then they move, get a divorce, or make their lazy fifteen year old kid finally do some chores.

Lifetime Value Formula:

$100 (per visit) x 26 weeks=$2,600 per year

$2,600 x 5 years=$13,000

Now, subtract your estimated expenses, such as $150 for fertilizer and about $150 for gas per year times five years:

$13,000-$1,500 (expenses) =$11,500 potential revenue

Finally, subtract your acquisition costs. That would be the cost of advertising and/or commissions that, for example, averaged $200 per new customer.

$11,500-$200=$11,300 profit.

I’m being simplistic for this example, so don’t quit your job and become a gardener.

But do this:

1. Identify your most valuable customers, and treat them accordingly. The 80/20 rule is 80% of your profits come from 20% of your customers. Know who they are, and treat your best customers, better!

2. Know the lifetime value of your customers and gauge your acquisition costs, accordingly.

So, the next time you feel down or worthless, forget what your X wife said about you to all her friends. To some retailer or merchant out there, because you have a high lifetime value, you are worth alot!

 

 

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