If you don’t know this, all your marketing is a shot in the dark.
I see it over and over again…
Die-hard business owners who are unwilling to spend a dime on promoting themselves.
Or, even worse, entrepreneurs who allow themselves to be sold epic marketing packages that keep them forever broke, always behind the eight ball and still frustrated by their lack of customers.
I have spoken to dozens of these businessmen and women and have come to this conclusion:
The #1 reason most business owners balk at the idea of doling out cash for marketing inquiries, tools, advertising, or end up panicking and buying expensive but often useless marketing tools. it is…
They simply don’t have an accurate idea of the lifetime value of their customers.
I conducted an informal survey of some local business owners recently, asking them the question:
“What is the average lifetime value of your customer or typical customer?”
Not surprisingly, only one of the ten I asked had any idea how to answer that question.
However, calculating the value of a customer to your business is more of an art form than an unchanging exercise in math. Unlike pure mathematics, there are variables that are hardly computed in a formula.
Let’s say you run a dry cleaner with a regular customer named Sam. Sam brings him a stack of shirts each week which, after subtracting costs, gives him a net profit of $7. Taking into account Sam’s 2-week annual vacation, and knowing that your clients stay with you an average of five years, it would be tempting to assign Sam a lifetime client value of $1,750.00
But what if Sam really was worth MORE than that?
Sam is a salesman and knows everyone in town. He loves the way you clean his shirts and he can’t stop talking about your store with others. As a result of Sam’s praise, you gain 4-5 new clients each year.
Now, you can safely assume that Sam’s value is at least twice your previous estimate.
So spending $500 to acquire one more customer like Sam would be a worthwhile investment.
Warning: Don’t get hooked on LTV or you could end up well over budget
LTV is simply a planning tool to help you plan your marketing budget. It is not a license to spend like the government.
I agree with Bill Gurley, general partner at Benchmark Capital in Menlo Park, California, who wrote an article in Forbes magazine warning against addiction to Lifetime Value.
Gurley writes:
“Some people wield the LTV model like they’re Yoda with a lightsaber: ‘Look at this amazing weapon I know how to use!’ Unfortunately, it’s not that amazing, it’s not that unique to understand, and it’s not a weapon, it’s a tool. Companies need a sustainable competitive advantage that is independent of their variable marketing campaigns. You can’t win a fight with a tape measure.”
In summary:
No matter how big or small your company is, it pays to get an idea of how much the average customer contributes to your bottom line.
That said, though, you don’t want to go around chasing unicorns; looking so far into the future and trying to determine what COULD happen to overspend on marketing. A consistent, conservative and realistic approach to ROI is the best way to go.
After all, the best way to acquire new customers is to work to bring uniqueness and value to your business and build a sustainable advantage over all your competition.