The customer is the greatest asset to your business, but even more important than the customer is the customer lifetime value.
Many CEOs and business owners don’t have any idea what customer lifetime value is or how important it is and the impact it has on their bottom line. What matters to most of them is to increase revenue by constantly gaining new one-shot customers.
This a serious mistake most business owners make. It will cost the average business owner five times more to attract a new customer than to bring one of your past customers back. If you’re a smart business owner, you know that every cent invested in advertising goes towards acquiring new clients. Once new clients are gained, you can’t afford to let them go.
What is customer lifetime value?
Customer lifetime value is the potential financial contribution of your customers to your company over a time period.
How do you calculate your customer lifetime value?
1). If you have 2,000 customers and they remain with you for an average of two years; your net profit over the last two years was $700,000. The customer lifetime value is calculated as: $700,000/2,000 = $350. This means over an average customer lifespan of two years, every new customer gained and kept is worth $350 in profits.
2). If you don’t have actual figures, you’ll have to estimate. The customer lifetime value will have a vital
impact on your bottom line, so be conservative in your estimation.
Why is this important to you and your business?
Lifetime customer value is important to your business for these reasons:
1). Knowing the value of your customers serves as a benchmark to guide your efforts.
When the lifetime value of your customers is known, you can determine how much you can afford to invest to gain that customer in the beginning. If you invest more today to reap large profits down the road, you can support it as long as you have the means.
Marketing campaigns cost you money but bring benefits like bigger sales, and enhanced corporate image. It is important to be sure the benefits outweigh the costs? This is why knowing your customer lifetime value is crucial - it can help to determine the cost and benefit ratio before launching a marketing campaign.
2). Realizing that clients are an ongoing stream of revenue not a one-time sale, helps to re-focus marketing efforts. Forget about constantly struggling to gain new customers, and focus on keeping your existing customers longer and increasing repeat sales.
If doing well in your business you can take a chance and offer more deals offers than your competition to acquire new customers now who will be spend money tomorrow.
Shift your focus to customer lifetime value to maximize your profits now!
Begin to have an understanding of customer lifetime value because it will be the key to success of your company. By allowing you to gain more customers than your competitors through better deals; it will increase your bottom line through more repeat sales and send profits sky high.
