Tuesday, June 23, 2009

How Much Is A New Customer Worth To You?

How much is a new customer worth to you?

Unfortunately, most businesses really don't know the answer to that question. And when asked, most owners will tell you what their average sale is - or how much they charge for their product or service. They rarely see the lifetime value of a customer.

Or asked another way, how much would you pay to get a new customer to walk through your doors, hit your website, or call you on the phone?

Sadly, in most cases, the answer to this question is a small percentage of a single sale / contract - usually only pennies on the dollar.

But is that all a customer is worth . . . how much he spent last time he patronized your business (or how much he will spend next time he patronizes it)?

Absolutely not!!! The true value of a customer is how much he or she will spend through the course of their lifetime - that is . . . when you manage to turn them from a one time customer into a lifelong client.

For example, to a brand new coffee shop, an average customer might spend $3.00 on their first visit. But if you can show real value to them and get them to love the experience of your coffee shop, that one time purchase goes from being $3.00 one time to $3.00 every day - generating upwards of $1000 / yr.

So, if the coffee shop owner only thought of the $3.00 sale, he might hesitate to give a perspective customer a $1.00 off coupon to try his product. But if that same owner knew his product was so good and the experience of his shop was so wonderful, the customer was sure to come back again and again, and that customer would spend $1000 in his shop this year alone, I bet he'd be willing to not only give them a free drink, but also buy them breakfast with it.

That's not to mention the fact that this new customer will most likely tell all of his friends and family about the new, fantastic cup of Iced Coffee he had and tell them they've got to try it. He'd tell them, "Not only is the first drink on the house, but you get a free breakfast with it."

Lifetime Customer Value is a Universal Concept

This concept doesn't just apply to coffee shop sales or other retail stores - this idea applies to every business, in every industry - no matter the price point of the product. If you look at your customer as only a one time purchase, that's how you will treat them - and you will have to work to get them to come back each and every time they decide they need your product. But if you build your business around building clients (regular returning customers) and respect / honor them for the amount of income they will generate for you over the course of their lifetime, you will rewarded with patronage, testimonials and referrals beyond your wildest dreams.

Figuring Out Your Lifetime Customer Value

To figure out what your "Lifetime Customer Value" is actually quite simple if you have the right stats. It's nothing more than the total sales you have generated over your history in business divided by the total number of unique customers served.

If you don't have those figures, it's a bit tougher and is simply a wish.

For example, going back to the example above with the coffee shop, we could probably make the assumption that an average customer will patronize a coffee shop regularly four times a week, 50 weeks a year and do so for 10 years. If the average sale price during that time is $3.00 that would be $6000 per customer. However, you might also recognize that for every one customer that likes your business, there are 3 how try it and decide they like Starbucks bitter coffee flavor better. So in that case your average Lifetime Customer Value would only be $1500.

In either case, whether you are tracking unique patrons and total sales before now, I would begin right away. It's important because you want to be able to know what a customer is worth and how much you are willing to give them to get them to try your product or service.

And so I close by asking you again. . . How much is a customer worth to you?

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