HOW TO DETERMINE THE LIFETIME VALUE OF A CUSTOMER Here’s a “secret formula” for determining the “marginal net worth” or “lifetime value” of a customer. This is a powerful, major concept that not 1 in 100 business owners knows. I didn’t until about two years ago when I studied the works of the master marketer, Jay Abraham. I’ll put this in my own words and keep it brief. The “Lifetime Value” or “marginal net worth” of a single customer is an actual number specific to your business. It’s VITAL to your success for two important reasons: 1. You have to KNOW where you are before you can determine precisely WHERE you’re going. You need a baseline number so you can effectively track results. 2. Until you KNOW EXACTLY what each new customer is worth to your business, you have no way of knowing HOW MUCH money you can spend in marketing to get that customer. Makes sense, doesn’t it? Take the time to calculate this! Master this simple but incredible concept, and you’ll have one of the least well-known tools in your marketing arsenal - and you’ll soon be chin-deep in cold, hard cash. Step 1: First, determine certain figures for your own business. If you’re new - make a projection. Q. What is your ‘average sale?’ (Add total dollar sales for a year, and divide that by the total number of sales transactions you completed, or expect to complete). Q. How many times a year does an ‘average’ customer buy from you? (Take your total # of sales transactions for a year, & divide it by the total # of customers). Q. For how many years does an average customer buy from you? (Remember, 20% of the population moves every year, so this is typically less than 5 yrs, depending upon the nature of your business.) Q. How many people does your average customer tell about you? (A major factor). The most common average is between 3-12, but guess. Q. What percentage of these people actually become your customers? (Usually between 20 to 70%). STEP 2: Here’s the thing - the secret formula… WHAT EACH CUSTOMER IS WORTH TO YOU IN COLD HARD CASH! Fill in the blanks below (using the numbers you calculated in Step 1, to find out precisely what each customer is actually worth to you right now. A. Average Sale = __________ B. Number of Sales per year per customer =__________ C. Number of Years customer buys from you =_________ D. Number of Referrals from customer = __________ E. % of Referrals who become customers =__________ F. Gross Sales per year per customer (A x B) =__________ G. Gross Sales over life of customer (F x C) =_________ H. Referrals who become customers (D x E) =__________ I. Gross Sales from referrals (G x H) =__________ J.TOTAL VALUE of Satisfied Customer (G + I ) =__________________ Isn’t this dynamic and powerful information when you run the numbers? Trust me - it’s worth your time to sit down and figure this one out! I won’t do this for you, since each business will be different. Plus, you get more benefit when you personally master the concept and do the math yourself. Try it - you’ll be astounded at the total “dollar” value of just ONE satisfied customer. I had vaguely ‘known’ it was high, but the numbers don’t lie. Bottom line: From now on, when you feel even remotely discouraged or when a customer starts getting on your nerves (hey, it happens), just think about the value of ONE satisfied customer - and smile. By Cheri Y. Sigmon
Posted on: Wed, 24 Jul 2013 09:50:46 +0000
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