Do you want to have an unlimited marketing budget? The first variable is your Acquisition Cost (reviewed last week) and the second part is Lifetime Value. When you know both of these numbers, you know how much needs to be invested to “buy” incremental business. Calculating this requires the answers to 2 questions: 1. How long do your customers stay with you; 2. How much do they spend during that time?
So how long do you keep customers? It’s important to remember that 1%, on average, will die every year. 3%, on average, will move away. (This may or may not affect your business.) 5% will choose to “shift” their business from you to a friend who has gotten into the same industry. On average, you could lose 9-10% of your customers every year through no fault of your own. That’s why your marketing should be designed to help “recruit” new business to replace the ones leaving for the above reasons. By the way, the single greatest reason that customers leave (and completely within your control) is Perceived Indifference. A startling 68% of your customers will leave if they perceive that you don’t care about them! One more point: it’s generally 6 times easier to retain a customer than it is to go get a new one. This underlines the importance of customer retention strategies. Go back through your customer list and measure how long your customers have been doing business with you. This exercise will yield your average “life expectancy” and may remind you to contact some folks you haven’t talked to in a while.
Next, you need to calculate your average dollar sale. You can figure this by customer and by product or service. Next, review your margins. Depending on the range of products/services you offer and the “mix” that your customers buy, you will obtain a blended average. (We’ll assume here that your fixed costs are covered.) Here is the formula: (Lifespan) x (average dollar sale) x (average gross margin, less direct incremental labor costs) = Lifetime Value. This number will vary with the mix of customers and the products they buy so it’s wise to re-calculate monthly. Once you get in the habit, it doesn’t take long and the information is powerful. And, you’re calculating your 5 Ways already, right? You manage what you measure, and you can change what you manage. Start today.