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What Is The Lifetime Value of Your Customer?
Average marketers define the 'value' of a customer by the amount of money he/she spends on a purchase. But a smart marketer takes a long-range view to consider the "lifetime value" of a customer.
All of your customers also have a value that goes beyond their immediate purchases. They know other people and those contacts are worth more business. They will tell others about your products and services, word-of-mouth advertising. They will give you referrals. They may have other business contacts that you can do joint ventures with.
The lifetime value of a customer is how much a customer will be worth to you as long as you're in business. This knowledge helps you determine how much to 'invest' in his/her care and feeding so that you'll achieve a positive return on your investment.
If you don't know how much a customer is worth, how do you know how much you should spend to get one?
To determine the lifetime value of a customer, you need to know and track...
How much a customer spends:
- How often per year he/she makes a purchase
- How many years he/she will remain a customer
Knowing the lifetime value of a customer will also tell you how much money you can spend on your sales and marketing to get the right return on investment (ROI) for your marketing dollar such as:
- How much should you pay for advertising?
- How much can you afford to pay a salesperson?
- How much is an appropriate referral fee?
- How much should you pay in a joint venture situation?
Don't Fly Without a Net Worth
There is one other consideration regarding the lifetime value of a customer. After everything is said and done, when the selling is finally over, how much did each customer bring to the bottom line? In other words, taking into account your expenses versus your income, you need to figure out each customer's net worth to your business.
Every customer will have a net worth, but it may not be achieved on the first sale. This big picture approach to sales may surprise you, but you must understand that it isn't necessary to make money on every transaction to end up in the black.
You can lose money in the short-term, but make it up in the long-term.
Profitable Principles You Must Understand
There are golden nuggets of information which should be constantly watched and monitored by all business owners:
- The conversion rate (closing rate) of prospects to customers/clients
- The average sale amount (or average initial purchase amount)
A closing rate is found in every type of business, regardless of industry. This statistic is important because profitability occurs when you increase conversions. So it's critical to ramp up your conversion rates without investing more money.
Average Sale Amount
The average sale is the amount of money a visitor spends on a typical purchase from you. To increase your profits, you need to increase your average sale amount. You do this by encouraging your customers to spend more money each time they shop.
All businesses are engaged with customers at a certain level of revenue. Ongoing, consistent efforts must be employed which help customers do business with you at a higher level of revenue.
Most businesses limit their contact with customers to the area of service or products in which the customer originally expressed interest. You have already established a relationship, so why not utilise that relationship to its fullest?
This is done by making certain that the customer is aware of all additional products or services that you have available. This is sometimes referred to as merchandising. There are a huge number of merchandising techniques. Let's look at some of the more common ones:
- Cross-Sells - related products or services to a visitor when they are viewing or buying a product or service from your website. (If your visitor is buying a hammer, then you might want to display a number of different types of nails)
- Up-Sells - more advanced or expensive product than the one that is being considered. (If your prospect is buying an iPod Shuffle, you might try and up-sell by displaying a full iPod or iPhone.)
- Volume Discounts - offer a cheaper price or a bigger discount as an incentive for a bigger order. You are actively providing an incentive for your visitors to buy in bulk and thus spend more money 'up front'
- New In Stock - new items that have "just arrived." This can be great for "early adopters" who love to try out anything that's new and always be on the leading edge
- Package Deals - combine a number of items into a package deal. Offer a special discount if the customer buys certain items as a 'package'. (Think of fast food meals where they package up a burger, fries and a coke)
- Free Shipping With All Orders Over A Specified Dollar Amount - encourages your prospects to top up their orders to ensure that they get the free shipping
- Free Gift With All Orders Over A Specified Dollar Amount - like free shipping, it encourages prospects to spend more to get something free.
Be sure to use a gift that has a high-perceived value, but costs you very little.
About the Author Strategies like that can explode your small business quickly, that's why I'd suggest you go right now to http://www.freemarketingbook.org and request a copy of Jonathan Jay's new book "Marketing Secrets of a Multi-Millionaire Entrepreneur"
Copyright SuccessTrack 2009
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