Understanding the value a customer has to your business over time is critical to making smart, cost-effective marketing decisions. Getting this right can light up your bank account. It will help you know:
• What market segments to target first.
• How much you should be willing to spend to acquire a customer.
• What types of customers you don’t want to spend money on.
• How much you should spend to retain existing customers.
• Which types of current customers you may want to “fire.”
Your magic bullet is something called “customer lifetime value.” CLV is a business-school concept that actually has real-life, make-or-break implications for small firms. Basically, CLV defines – in dollars – today’s value of the future profits your business can expect from a customer over the entire time they remain your customer. That time could be a day – or a decade. It’s important stuff; especially for small businesses that have been lured into the daily deals game and may be sacrificing long-term relationships for a few quick bucks.
CLV does take some effort. But it needn’t be hard. (Below, I’ll tell you about a handy, online CLV calculator you can use for free.) In simplified form, here’s how you get to it:
1. Pick a time frame; say 10 years.
2. Take the total annual revenue you expect from a customer – including expected changes up or down each year – and add them up.
3. Subtract your expected costs of attracting the customer in the first place, your cost of goods sold, and the costs of servicing the customer each year.
4. Apply a “discount rate” (usually 10-20 percent) to recognize that a dollar you hold in your hand today is worth more than one you get in the future.
One thing you’ll quickly discover is that common sense is correct: The longer you keep a customer, the more profit they produce. That’s true most of the time. Trouble is, not all customers are the same.
They cost different amounts to acquire. They produce different amounts of revenue and stay with you different lengths of time. They also require different amounts of care and feeding. If you don’t account for these differences, you’ll end up paying to acquire and keep unprofitable customers.
Bottom line: Segment your markets and spend more to acquire and keep your best customers. Think of it this way: Does it make sense to spend, say, $40 to attract a new customer (with a Groupon offer, for example) while spending nothing to keep a customer you already have? •
Daniel Kehrer can be reached at editor@bizbest.com.
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