What Are Your Customers Really Worth? – Marketing Tip 8
What’s Your Lifetime Customer Value?
Knowing what your customers are really worth will stop you wasting money
There’s one really simple reason why you’re going to waste thousands on marketing budgets if you don’t learn this golden rule.
Here are three reasons why you should read this Tip and follow the ideas in practice.
1. You’ll never get the best from your marketing if you don’t know what your customers are worth
2. Without learning this core business concept you’re destined to waste your money on marketing
3. This is the ‘trick’ that smart business insiders use every day to make marketing work for them
How do you know what your customers are worth?
In this Marketing Tip we’re going to look at how the financial mechanics of marketing will help you to decide where to spend your time and budget.
Now before your eyes glaze over this is NOT going to be an accounting lesson. It is about understanding what customers are worth and it will help you create a marketing plan that is profits driven.
Why is this important?
Well, the real world looks something like this; business owners and managers everywhere see marketing as some sort of gamble, a risk, a punt. It’s about throwing money in every direction and hoping that by ‘getting your name out there’ a flood of customers will beat a path to your door.
It’s a fact this is the way that the vast majority of business owners think and behave. That’s not good. It’s chaotic and immensely wasteful.
There are three things that you need to understand right upfront about marketing –
- It’s about the customer, not about you, your business or your product/service
- It’s about creating value, promoting it and then exchanging this for profit
- It’s about learning, improving and most of adapting to things as they change (and they do)
So first up you need to remember that your marketing and promotions, and your sales process for that matter, is about the customer. And I’m not talking about some platitudes about being ‘customer-focused’, I mean it’s about being really centred on understanding your customers, their wants, needs, expectations and perceptions.
Secondly you simply must take a view that the marketing in your business needs to be a profit generator. Now I accept that not every action or output in your marketing will be directly profitable. There will be parts of your marketing mix that are used to support other elements but on the whole you should be looking for a clear ROI on your marketing.
And thirdly, it’s all about learning what works, refining, developing and adapting. Your marketing will never stand still. If you’re running the same adverts you were ten years ago you need to really ask yourself how have things changed and have you kept up with them?
Yes, consistency in marketing is crucial and there’s good reason to believe that ‘if it aint broke don’t fix it’, but look… there are so many way we can market now, so many tools and resources, there could just be a better way right around the next corner. So have you looked?
If you’re still spending £000’s a month on press adverts maybe it’s time to ask if it’s worth testing something else to get a comparison. After all you could just save yourself a small fortune and make more profit as a result.
Now coming back to the point about your customers. Here’s a marketing tip that I really want you to dive into. I promise you, once you get this you’ll completely change the way you think about your marketing.
You might even let go of a little bit of that fear or anxiety you have about marketing.
Marketing is really pretty simple to be honest. People often lose sight of the main objective, which goes something like this:
You have something you want to sell, you want other to buy. So you spend some time and money and create a customer who wants to do business with you. The money (and time) which you spend on marketing needs to produce more money than it costs. That’s call profit!
I really don’t want to sound patronising but it’s worth us all remembering that this is the golden rule.
And there’s one basic and fundamental thing you’ll need to do to be sure of this; you need to know what a customer is actually worth to you.
This is crucial, as without this knowledge how can you know if you’re getting a positive return on investment with your marketing, or are you wasting your profits at a loss?
So where do you start with this, the good news is that it’s simple.
Firstly you’re going to need to work with averages. That is the only practical way to address this matter. So you may be able to calculate that your customers, on the whole and as one group, can be analysed to create one average value.
For example, a coffee shop will know (or should do) that their average customer transaction is £6.47
Looking at all till sales per day, per week, per month, and perhaps taking into consideration seasonal variation, it can be calculated that each customer transaction is worth an average value.
On the other hand you may have a range of customer types, with different needs. Some may spend a lot with you, some only a little. So the first thing you need to do is break this whole customer group into smaller segments. Don’t aim to have too many or the task will become overly complicated.
You might want to tier or band your customers. Top, average and low might be a good place to start. However you may want to group customers on the basis of the products or services they buy. That’s a good idea as it will help you to recognise what your most profitable products/service are.
Once you’ve created these groups next you can look at how much they spend and over what period of time.
Some businesses will attract customers who only ever do business with them one time only (not a good idea). As such you will know what the average lifetime spend is.
Other businesses and I hope you’re one of them, will serve customers several times over the course of a year, or beyond. Sometimes these relationships last years.
So you will want to do some basic maths on how often a customer comes to buy from you, how much they spend and what this adds up to over the ‘lifetime of the customer’.
Now again this is an important point to consider. The lifetime of the customer could be a few months, or could be years. Let me give you a real-life example.
When I was working with a large national accounting firm (as Marketing Manager) we had one Accountant who came to realise that an average client was worth in the region of £1,000 per year to him but crucially, if he took care of them and served their needs, they were likely to continue using his services for at least four years. This meant that a new customer was potentially worth £4,000 to him.
Armed with this information this meant he now had a very different perspective on how much he was willing to invest to buy each new client. And he did this through referrals, recommendations and partnerships with other professionals.
Through using a transparent and ethical referral scheme he was able to pay a commission to partners for the introduction of accounting new clients. He paid handsomely for this and showed his appreciation by setting the value where it belonged.
More importantly he had highly engaged partners seeking new client opportunities for him. As a result his business grew fast, very fast. In fact in less than a year he became the fastest growing practice in our national network.
Hopefully this simple example demonstrates my point. When you know what a customer relationship (not just the first sale) is really worth you can then invest with more accuracy and confidence.
The exact same rule applies in all other forms of direct response marketing. For example; if you’re running a Pay-Per-Click campaign with Google, you should know what each visiting customer is worth to you, on average.
If it takes 500 (would-be) customer visits to your website before a sale is made online, or perhaps an order is placed directly, and each visit costs you £1 per click, suddenly you know that it’s cost £500 to get that one customer. So you better make sure that you’re profit margin allows enough fat to absorb that as your marketing cost.
Then there are other factors (this is where the whole idea gets really exciting!). Imagine what happens then when you ask each customer to recommend your business, service or product.
Now a customer’s value suddenly jumps. If only 10% of your customers provide profitable referrals that’s fine and you can still add this extra value to the average of your Lifetime Customer Value.
In Summary –
So before you spend any more money on your marketing, or before you get started, work out what customers are actually going to be worth to you. Then you can choose marketing strategies and tactics that put profit back in your business.
If you’re a brand new business then you may need to start off with some projections. This is fine; it’s just a starting point and about making some initial predictions. Your figures might turn out to be way off (almost certainly overly optimistic) but that’s OK because you have a basis from which to work.
As long as you keep accurate records you’ll soon be able to build up a clear picture of what’s really happening in your business. And this will help you to measure your business success in the early days.
Just remember to always focus on the profit from each customer, which you extract (already knowing your Gross Profit Margins) from the average Lifetime Customer Value. The money you need to spend to ‘buy’ or ‘win’ each new customer is a cost that must come directly from your remaining profit.
So here are some questions that you should look to ask and consider to help you start this –
- Do I know what an average customer is worth to my business?
- Do I know how long a customer’s ‘Lifetime Value’ will last?
- Do I know what my Gross Profit Margins are so I can calculate what I can spend?
- Do I know how much I’m willing to invest to buy each customer and still make good profit?
- Do I know what current marketing activities are making me money and which are a negative cost?
What Next? –
I strongly encourage you (even implore you!) to give yourself time to sit down and work out these crucial figures. I’ve never met a business yet that has produced consistent success with their marketing without knowing the financial basics of their marketing spend and return.
If you feel you’d like more help understanding this, or want to gain more clarification, you can read about it in Module 5 of Make Marketing Work (the online marketing course), which is all about Understanding Business Mechanics.
This is a simple but massively important concept. And if you want to learn more about it, as well as what the other two Key Turnover Drivers are, then I encourage you to get on the Programme and start with the Free Sample Chapter of Make Marketing Work.
If you want to know more, would like to get more understanding, or simply want a little help to get you started with this, please contact me personally, or post your comment below. I promise to reply.
To your success,
PS. If you found this Marketing Tip useful and interesting make sure you sign up for the full email course, it’s free!