Monday, October 23, 2006

Week 10 - The Power of Lifetime Value

Once you are measuring, testing and marketing as effectively as possible, you will start to see how you can attract more people into your business without spending additional money.

You also know who is coming into your business and why, so now we need to work out what each of them is worth to your bottom line. There are two reasons for this, the first is so we can tailor our marketing program to the amount of money each customer is worth and secondly so we can convey this figure to all employees. It doesn’t matter whether you sell do-it-yourself will kits and see your customers only once or if you sell seafood and see them every second day. The principle that it costs real money to attract each customer still applies. Given this cost, what is each prospect worth to your business over a year, or a lifetime?


Lifetime value = average number of purchases x average value of sale x average number of years as a customer


You really need to spend the time to work out this figure “on average”. Don’t get too tied up in it being exact, you need a number to guide you and you need it now. The lifetime value number will be used time and time again in the future to justify marketing programs or to help you sell your business system so put in the work and review it regularly.

Sometimes a simple testing and measurement program can reveal that you are actually paying more to attract new customers than they are even worth if you manage to sell them! It is often difficult to gauge as the phone is ringing and the workplace appears busy, but it is like the old story about the boiling frog.

If you have heard this a million times, bear with me because many have not and it is a great illustration of how we fail to address problems because everything seems “all right.” The story goes that if you throw a frog into a pan of boiling water, the frog will immediately jump out of the water rather than sit tight and be scolded to death. But what if the frog is put into a cold pan of water and the temperature is gently raised to boiling point? Well because everything “seems all right”, the frog stays where it is until of course it is too late, eventually the water is boiling and the frog is dead.

“All right” should be a warning sign to every business owner. You need the real data to make these important business decisions, not rely on feelings about how everything is going in the business.
Your staff need to know!

Another important reason to measure the value of each customer is so you can train your staff to see each customer as their annual or lifetime value, not a single transaction. For example, rather than the cash register clerk at a shoe store seeing the customer as a $129.95 once off sale, they would see them as $129.95 x two pairs per year x the number of years you can keep them as a customer! If your employees can buy in to the fact that this person is worth over $2000 to the business over the coming years, you can really instill a sense of importance into each and every transaction. This kind of thinking can and should be applied across the business and procedures put in place so that the sales clerk has no other option but to treat the customer as worth $2000 in sales.

How many times over the years have you been treated in a “once off” manner?

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