The Critical Importance of Understanding Your Customer’s Lifetime Value

“Treat your customers like lifetime partners.”
Michael LeBoeuf

To run a successful business, you need to know exactly what a customer is worth to you. Knowing this not only helps determine how much money you should spend on advertising and marketing to get a customer but also how much time, money, and effort you should spend on trying to keep a customer! If your customers spend only a few dollars a year, then you certainly can’t send them a hamper full of goodies at Christmas time. If, however, your customers spend thousands of dollars with you, then it might well be worth the extra goodwill.

I remember back in the mid-1980s reading Carl Sewell’s book Customers for Life. At that time he found that the average Cadillac buyer at his dealership would eventually spend over $375,000 with him—as long as he kept them happy. It must be triple that now.

In my karate school, we figured out that the average student would spend about $1,000 over the course of his training. In my marketing business, the average client is worth far more than that.

Take a look at your top 20%—your best clients. What did they spend with you last year?

Take a look at your bottom 20%. What did they spend with you?

After throwing out the bottom 5% and top 5% which might bias your results, what is your average client worth to your business?

You might be surprised by how much your best clients are spending with you in a year. Now project that number over five years, ten years, or perhaps even longer.

For example, I use a local limo service at least once a month to go to the airport at a cost of $75 plus tip. This means that, providing they keep showing up on time, I will be worth well over $8,000 in business to them over the next five years, and closer to $20,000 over the next ten when you take inflation into account.

That means that I ought to rate the occasional upgrade from a town car to their stretch limo. I should make their Christmas card list, and I might even get a small token gift now and then. Going the extra mile and spending $25 to $50 a year on me is going to be well worth the cost and will be far cheaper than finding a new client to replace me.

The value of clients cannot and should not be measured just in terms of dollars spent. There are other much more intangible measures of a client’s worth that are equally important in terms of building your business. For example, I have several clients who don’t do a great deal of business with me, but account for a large portion of my referrals. They are like sports fans, always telling others how my business has helped them. Their worth in terms of referral business adds up to far more than the dollars they spend.

Other clients are worth far more than the books show because of their marquee value or brand name. I just picked up the marketing account for a large and prestigious resort. Although the dollars involved are small, having their name on my list of clients will undoubtedly produce more business for me. The same will be true in your business. Certain clients or companies that you do business with add to other people’s perception of your business expertise and quality. That makes those clients special.

As business owners, we get so caught up in looking for new clients and chasing new prospects that we can fail to properly service our very best and most profitable customers. Going through this process and figuring out just what your customers are worth, both tangibly and intangibly, on an annual basis, can go a long way towards helping you focus your efforts on the customers who most deserve your attention.

Determine your customers’ lifetime value now!

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