MARKET DOMINATION STRATEGY #2: Lifetime Customer Value
Let’s talk for a minute about the second thing that every business owner, every manager and every entrepreneur needs to know to gain an advantage over his competition.
It’s simply this – determine Lifetime Customer Value.
Here’s what it means:
How much money…how much profit will you realize from each of your customers, over their ‘buying lifetime’ with you?
This is such an important concept, and I can’t say it strongly enough. Just knowing and understanding this one thing can have a bigger impact on your business than just about anything else you can do.
It will bring a whole new set of factors into play and can absolutely change the way you look at your business…the way you do business…and the profits you’ll generate as a result.
Let me give you an example to explain what I mean. Let’s say that your average customer buys from you three times a year and let’s say that after you pay for the cost of goods, overheads, and salaries, you end up with a net profit of $100 on each sale. That $100 three times a year, nets you $300 in profits for the year.
Let’s say that the customer does business with you on average for five years.
Over that five-year period (or their ‘lifetime’ of doing business with you), that average customer has been worth $1,500 in profits to you.
Now, let’s expand this example to a theoretical base of 1,000 customers and see how this can pay off. Those 1,000 customers at $300 a year net you an annual profit of $300,000.
Now, let’s assume that with the proper programs in place, you’re able to increase each of the three ways to grow your business (the three Business Multipliers), by only 10%. Here’s what happens:
The number of leads increases (Multiplier 1) and your sales conversion rate (Multiplier 2) increases to result in an extra 100 customers. You’ve gone from 1,000 to 1,100.
Now onto Customer Maximization (Multiplier 3)…
The average sales value increases, so the profit from each customer increases from $100 per year to $110.
The average number of purchases per customer increases from three times a year to 3.3 times.
So, the annual profit from your customer base will increase from $300,000 to $399,300 (1100 customers x $110 profit per sale x 3.3 sales per year). That’s an increase of nearly $100,000 a year…or 33.1%!
But that’s not all. Let’s say you put an effective referral generating system in place and just 10% of your 1,000 customers send you a referral with a buying profile the same as your average customer.
That’s an additional 100 customers who will bring you profits of another $36,300 per year (10% of 1,000 customers = 100 customers spending $100, three times a year = $36,300).
Now let’s work on extending the number of years your customers do business with you. In our example we used a figure of 5 years. But with some good systems in place it’s not at all unreasonable to extend that time by 10% to 5 ½ years.
The lifetime value from those original customers over the original five-year period then, is $1,500,000 (1,000 customers x $300 profit per year x 5-year buying lifetime).
But, with the 10% increase on buying lifetime to five and a half years, your total value from these customers will increase from $1,500,000 to $2,395,800 (1200 customers [1100 plus 100 referred] x $110 profit per sale x 3.3 sales per year x 5 ½ years)! An increase of $895,800…or 59.7%!
That’s a major increase!
Sound impossible? Well, it’s not. It’s not all that difficult, either. It can be done by simply increasing each of the four areas by only 10%!
Knowing And Then Applying The LCV Of Your Customers Is One Of The Most Profitable Things You Can Do In Your Business
Now, how hard would that be to do in your business?
Could you realistically, and with some help, increase each of the four areas we discussed by 10%? What about 20%?
Well, some of the businesses we consult with, after realizing the power of this key concept and the others that we’ve discussed, have increased their businesses by as much as a 100% or more in less than a year.
Now, maybe the numbers and figures I’ve discussed are realistic for you and your business and maybe they’re not. Maybe you can’t increase each of the areas by the same percentage.
That’s okay. It doesn’t matter. The point is you probably have room for improvement in one or more of the three Business Multiplier areas. If you want your business to be a viable force in the marketplace and to give you the lifestyle, the satisfaction and the income you want, you’re going to have to take some proactive steps.
As I mentioned before, just knowing how much your customers are worth to you, can be invaluable and can help you in many ways.
First of all, we know people don’t buy from the same company, firm, store or organization forever. They stop doing business or change who they do business with, for a variety of reasons and we’ve already discussed some of those.
If you know, for instance, that your typical customer stays with you for say, five years on average…that they’re not just a one- or two-time sale…you may begin to treat them differently.
You may treat them with more respect, more kindness, more courtesy. You may give them some form of special treatment. You may even invite them to special, invitation-only preferred customer sales or events.
In other words, once you begin to see your customers in a different light you may begin to do things differently in order to get them to stay longer as customers.
Next, if you know what the Lifetime Customer Value of your customer is, you’ll probably discover that you can spend far more to acquire a new customer than you originally thought.
So if your average customer is worth $1,000 in profits to you, you can, theoretically, afford to spend up to $1,000 to bring in a new customer and still break even.
Now, if you have additional products or services you can sell your customers, or if you can arrange joint ventures with other businesses that have complementary, but non-competing products, you can spend that same $1,000 and make a profit on the other products.
If you put an effective referral-generating program in place, you can spend that same $1000 and make your profits on the referrals they generate.
Now you and I both know that it’s unrealistic to think that you can really afford to spend the full amount of your lifetime profits (in this case, $1,000) to get each new customer. I’m certainly not suggesting that.
In reality, you can’t spend the entire $1,000. You’ve got to be concerned about things like cash flow and reserves…you can’t spend money you don’t have.
You have to make sure that the customers you attract, at least match the profile of your average customer, or perhaps are even a little better than average.
There are a number of other things you need to be aware of, such as ‘Cost of Acquisition’, ‘Cost of Retention’, understanding your ‘Margins’.
When You Know How Much You Can Afford To Spend To Acquire Or Keep A Customer, Your Competitors Don’t Stand A Chance
What it really comes down to is two questions: How much can you afford to spend? How much are you willing to spend to attract new business?
You may find you can and are willing to spend five or six times what your competitors spend. If they’re not willing to keep up with you, your business may just explode and leave them in the dust.
Just knowing what your margins are gives you a tremendous edge over your competition.
Here’s an example. My wife and I have a favorite restaurant we like to go to about twice a month. And our meals typically come to about $150. So $150 x 24 meals adds up to $3,600 in gross sales for the year.
Now let’s suppose that we continue to use that restaurant for, say, 10 years. That’s our buying lifetime with that particular restaurant. That gives the restaurant a total of $36,000 in sales.
Now, if over that 10-year period, we refer five people (and that’s not very many in 10 years), who have spending patterns similar to ours, they’ll spend an additional $18,000. (That’s 5 people x $3,600 a year.) Add that to the $36,000 that we spent, and we’ve been responsible for generating $216,000 for that restaurant.
Even after deducting expenses for overheads, salaries and food costs, the restaurant still realizes a pretty substantial profit from the efforts of just one couple.
Now, here’s a question: Could that restaurant afford to give away a free meal to attract a new customer? Keep in mind that two of us are spending $150, so one meal costs $75, and out of that, about a third of it (or, maybe $25) is profit. So, the meal really only costs the restaurant $50, and only part of that $50 goes to cover the cost of the food. The rest of the expense is in overhead, which would have to be paid whether or not a meal was served.
Well, of course the answer is yes, they can afford to give away a free meal. Or at least a free appetizer or dessert. Not only that, they can afford to do a number of other things, to not only attract new customers, but more important, make their existing customers feel more appreciated and more special.
You know when someone feels noticed and important…appreciated and special…it’s just natural that they’ll want to return.
Let’s imagine, for a minute, that you are a long-time, faithful customer of a certain restaurant and you brought your family, your clients or your business associates with you to eat there on a regular basis.
How would you feel if sometime the manager of the restaurant were to offer you and your party a free dessert as a special appreciation gift for your loyalty and for the extra business that you brought them? Do you think that little display of appreciation would cause you to want to return again? It probably would.
What about the people who were with you? How do you think they would feel? Do you think they would want to go back to that restaurant?
Sure they would. What do you think the restaurant’s hard costs of those desserts would be? Do you think the restaurant would lose any money on that gesture?
Well, it’s not likely. You see, once you know how much profit your customers are worth to you, long term…then, and only then, can you determine how much you can afford to give away or to spend to get new customers or to keep your existing customers coming back. You can begin to experiment with different offers to see which ones work best.
What we’re touching on here is what we call ‘Irresistible Offers’. Maxwell Sackheim (the American marketing genius) was the first to introduce this notion of ‘Irresistible Offers’ (or ‘loss leaders’) when he created the ‘Book Club’. Many book clubs have copied this approach since, but you can apply it to your business too. I’m sure you’ve seen the offer before (you may have even joined a club because of it)…
“5 books for $1”
Now clearly the book club (or music club etc) is losing money on the first sale, but the offer is so compelling that it forces many people to join.
But what the book club knows is that the average buying lifetime of their customers means they more than recoup the initial shortfall and in return make hefty profits from future purchases.
There’s absolutely no way they would have ever come up with this offer if they didn’t understand lifetime customer value.
As you’d expect, we work carefully with our ‘Client Partners’ to calculate the average lifetime customer value, and then create an offer so compelling, so irresistible, that people are drawn to it like a magnet.
This is truly one of the most important and profitable marketing strategies available to you!
You Don’t Necessarily Stop Running An Ad If It Doesn’t Pay For Itself On The First Run
Now, here’s another thought. Let’s say that the owner of that restaurant runs an ad or does a mailing to attract new customers.
And let’s say he spends $750 for the ad or the mailing and two couples come in for dinner and each spends $150.
Well, he’s taken in a total of $300, but the ad costs were $750. So what does he do? What would his competition do? Does he consider the ad or mail campaign a loser…a total bust…and stop running it?
That’s what most business people do.
But what about you? What would you do? Well, if you understand the concept of Lifetime Customer Value you’ll probably think differently.
When you consider the Lifetime Value of those customers and realize that with the proper care and attention those customers could be responsible for $36,000 each…or $72,000 for the two couples…it completely changes the picture.
Now of course, those are gross revenue figures and you have to deduct for expenses and it’s over a 10-year period. But, still, that represents a significant amount of money…and all from a $750 ad…an ad that most business owners would have given up on.
Now, I’m not saying that you have to settle for and be happy with low response rates for your ads. Certainly you don’t.
You should always try to improve your ads, your letters, your offers, and give good, compelling reasons and benefits for someone to do business with you.
But let’s go back and think about our restaurant example. Did this idea of stopping an ad just because it didn’t break even or produce a profit for you sound unusual? Different? Strange?
Well, maybe to some people in some businesses. But supermarkets and department stores use their own adaptation of this technique all the time. You’ve probably heard it referred to as a ‘loss leader’.
What they do is, advertise a few products at or below cost to bring new customers in to their store, knowing that the customer will usually buy more products once they’re in the store.
Also knowing that unless they get someone to visit their store in the first place, they could never stand a chance of making additional or repeat sales or getting referrals.
Additional and repeat sales to existing customers are generally easier to make and usually always bring higher profit margins.
Just remember this important point: The first sale means nothing…unless you’re planning on going out of business next week!
You’ve got to consider the Lifetime Customer Value…what your customer is worth to you, if you really want to be successful.
Calculating The LCV Of Your Customers
Now, what about you in your business? How can you apply this concept of Lifetime Customer Value?
Well, the first thing you can do is determine what the amount of your average sale per customer is.
Then subtract out the hard costs so you’re left with the profits from that sale.
Then multiply that amount by the number of sales you make to your average customer during the year.
And finally, multiply that amount by the average number of years your customers do business with you.
The number you have left, will be the Lifetime Customer Value.
Now, if you add the profits you make on any referrals they send your way, their value to you will automatically increase by the amount of those profits.
Now, the next thing you can do is begin to find ways you can increase the value you provide to your customers so they’ll want to spend more with you, buy more often, stay with you longer, and bring others to do business with you.
That gets right back to what we discussed earlier…the methods of growing your business (the three Business Multipliers).
That was Market Domination Strategy #1.
And #2 we’ve just covered…calculating the Lifetime Customer Value of your customers.
And now Market Domination Strategy #3…identifying, quantifying and articulating your Unique Selling Proposition….