What are your customers really worth?
Probably more than you realise, unless you look at their “lifetime value”. Understanding your customers’ true worth will put you well on the way to making the best use of your marketing budget. A long-standing MAXX client, Griffins Accountants, tell us how….
The idea is quite simple; your customers bring financial value to your business over their ‘lifetime’ as your customer. If you know what that value is, you have an important business-planning tool.
How to calculate lifetime value:
To begin with, you need to know:
- the average length of time a customer stays with you (A)
- the average net profit you make from sales to the average customer over that period of time (B).
The chances are, your customer will also bring you value indirectly, for example by referring other people to you. That value should also be brought into the calculation:
- added value (D).
Let’s take as an example the mythical firm of consultants, Gryphon Ltd.
Merlin knows from its records that, on average, they keep their clients for five years.
A = 5
A quick calculation shows that the average profit made from each client per year is £5,000.
B = 5000
So, over five years, Gryphon makes an average of £25000 profit on sales to each client.
A x B = C = 25000
However, this is not all. Gryphon Ltd also knows from experience that, on average, each client brings in one new client as a result of a recommendation. That means that each existing client has an additional value of £25000 x 1.
D = 25000
So, to calculate the lifetime value of their client, Gryphon’s Finance Director adds C to D:
C + D = 25000 + 25000 = 50000
Gryphon Ltd has just discovered that the lifetime value of its average client is £50,000.
It really is that easy!
Using the lifetime value figure
When you know what your customers really are worth to your business, not only will you have increased confidence in your sales forecasts and cash flow projections, but you will also know how much you can afford to spend on trying to attract new customers.
For example, Gryphon is considering an advertising campaign in the national press. The campaign will cost £40,000, a great deal of money to a small firm. However, they now know that the campaign only has to bring inone new customer for the investment to pay off. For an outlay of £40,000 they will have acquired a new client worth £50,000.
And all that means…
You must nurture your customers! Their lifetime value to your business will be increased if you keep them longer, persuade them to buy more from you, or if they are so delighted with your service that their recommendations bring you new business.
When you know how much that customer is really worth to you, a little extra effort will always be a good investment.
Jean Piercy of Griffins, a leading firm of chartered accountants and business advisers in Berkshire, submitted this article. MAXX launched Griffins’ new website earlier this year
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