What is a customer worth to you?

The start of a New Year causes many people to reassess things that are important to them before making decisions about their priorities and plans for the coming year. Many businesses take the same approach at their year end.

‘What is a customer worth to you’ is a really fundamental question to ask of your business and the answers you get may surprise you.

A good way to answer this question is to calculate your customer lifetime value (CLV), which is a relatively straight forward calculation and yet so many businesses don’t know this information. Here’s one starting point to get the figure:

  1. Calculate your AVERAGE SALE – by dividing your total sales (excluding taxes) by the number of actual sales made.
  2. Next calculate the NUMBER OF SALES PER YEAR PER CUSTOMER – take the total number of sales transactions for a year and divide it by the total number of customers. (If you don’t know the number of customers – why not? This is critical information so find a way to identify this data now)
  3. What is the LIFE EXPECTANCY of your typical customer – analyse your customer database to establish how long your customers remain active with you and select the figure where they typically stop purchasing.

Let’s assume that you arrive at the following answers:

Your average sale value is £35.00

Each customer averages 4 purchases per year

Typical life expectancy is 4 years

 

This would mean you have a CLV of £560 (35 x 4 x 4)

Know what your customers are worth

Now this may be interesting data, but it will also provide a basis to expand your thinking about what a customer is worth to you. For example, you might add into the mix that each of your customers, on average, provides 6 referrals over their lifetime and typically 2 of these become customers who, in turn generate £560 of business in their lifetime. This effectively triples the real CLV of your customers making each satisfied £35 customer worth £1680 to your business.

You might choose to segment your customer data so that you can compare CLV’s for your best, average and least active customers. This may yield surprising results that help you focus your marketing and customer service efforts.

What if you added acquisition costs into the mix? It may show that it costs you twice as much to attract some customers who end up either spending less, or staying loyal for only short periods.

Cause Related Learning

What would you add to make the data worthwhile for your decision making?

If you would like help with improving the value of your customers contact us and tell us more or

CALL NOW on 0845 2177 071

1 comment… add one

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  • Joe Warner January 28, 2012, 9:11 am

    This is a new technique to me but I can see how its application could turn up some very interesting numbers. Of course I suspect that the real challenge is not producing these numbers but building a strategy to leverage the investment that you have made in producing them.

    Reply
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