Customer Lifetime Value
If you can keep them coming back again and again, week after week, month after month, year after year, what would that be worth in revenue and profit for your business?
Equally, what if we could get them to like us so much that they recommended us to everyone they knew and got them to buy from us too?
Unfortunately, most businesses don’t treat their customers like they have this lifetime value. Instead they treat them as a single sale. You have to turn them into lifetime value for your business.
Here’s an example of a dog food business. It was a high quality product with high quality service and they charged a high quality price which led to lots of profits.
They figured out that they made £38 of pure profit on each sale, so anything under £38 could be spent to buy more customers.
If my marketing “bought” me customers for £24, how often could I run them? I’d run them all the time, as long as they were effective.
How often would you spend 24 if you knew you were going to get back 38? Every time you could, right?
One of the guarantees the dog food business made was if your dog died while you were a customer, they would buy you a new dog.
They found that their customers spent an average of £800 a year and, on average they bought for three years. That gave each customer a lifetime value of £2400, well below the cost of the dog you’d buy them.
But then they also found that typically, each customer was referring them to two of their friends, and each of those referrals was introducing them to two more potential customers.
In the end, they realised that each customer was potentially worth almost £17000 over the course of the three year average. A new dog is a small price to pay for that kind of lifetime value.
How much do you spend at your favourite restaurant every year? Do they treat you like a single sale or a lifelong customer?
How do you treat your customers? Are you always chasing the new guy, not caring too much about your existing people?
Ask yourself, how much of your business is from repeat customers? If you don’t know, it’s time to work it out because repeat business equals profit. There is a direct connection.
Think about it, you spend so much money buying customers doesn’t it make sense to keep them coming back forever?