The Most Profitable Thing You Will Ever Do For Your Business Is to Understand and Ethically Exploit The Lifetime Value of a Customer or Client!

The Most Profitable Thing You Will Ever Do For Your Business Is to Understand and Ethically Exploit The Lifetime Value of a Customer or Client!

Believe it or not, provided it doesn’t rain, there should statistically be 60 people there to bid you farewell … at your funeral.

Now that’s a sobering thought. So why is it that in life, we treat our customers, and in turn we are treated as though we are at best insignificant, at worst like lepers or bankrupts?

By that I mean that the focus of nearly every business I see, is “how to get a new client” when, in fact, these businesses have never “exploited” the true value of that client or indeed of the “friends and associates of their clients”. (those 60 mourners paying their respects at their/your funeral.) And when you consider that it is six to eight times more expensive to get a new client than it is to sell more to an existing client, this oversight seems almost obscene.

Now I’m not saying you should take your focus away from attracting new clients – you shouldn’t! In fact my view is that if you’re not growing, you’re dying. What I am saying is that it is so much more effective in terms of cost and time, (resources) to direct your efforts to your existing clients, friends and associates.

What is the current Lifetime Value of one of your customers or prospect?
It is the total aggregate profit of an average customer over the lifetime of his or her patronage ¾ including all residual sales ¾ less all advertising, marketing and product or service fulfilment expenses.

How to calculate the Lifetime Value of a customer

The key to getting all the customers you will ever want, is understanding the Lifetime Value of your regular customers. This is what an average customer spends with you over a period of time.
For example: If your average customer spends $20 every time they visit your business, or place an order. If they come twice a month for three years, a customer is worth $20 x 24 x 3 = $1,440.

Work out your Average Lifetime Value of a customer for your business:

$20 x 24 x 3 = $1440

Average Number of visits Number of years = Lifetime value of a Customer per year customer Purchase

Once you work out the lifetime value of the customers you want to attract to your business, you can then determine what you have to do and what to offer them to get them to try your products or services.

Knowing what a customer is worth, say $1,440 to you over a period of time, means that you can make an “up-front” or aquisitional loss on their first visit with you and still make a fortune over the next 12 months to ten years and beyond. What could be better than that?

In today’s competitive marketplace, it is vitally important that you get lots of new customers to try your products and your service as quickly as possible. After all you have rent, wages and other overheads to pay no matter how much business you get.

Once they are trying your products and service your chances of getting them as regulars are greatly increased.

It is far more cost effective to give away a sample of your products and your service, than to spend cash on expensive promotions and ads.

After all, your biggest expenses are fixed overheads. The rent, wages, power etc are the killers of your profits. The additional cost of an offer is only a fraction of what the potential new customer is worth to you. (Lifetime Value).

Once a customer tries you once, your aim is to get them to come back a second time and then become a regular .

A word of warning, if your product or service is not up to standard, this approach will send you broke very fast.

No doubt, in the past you have chosen to do business with someone, only to find the service unsatisfactory. Guess what …. You never return and you tell 22 of your friends how terrible it was.

Don’t let this happen to you in business.

It is absolutely vitally important that you at least attempt to evaluate the life-time value of a client to you. Then you will know how much money you need to spend in order to get him the first time and how much money you are likely to make over the lifetime of that client. This is critically important to your future success.

No longer will you need to say “What should my advertising and marketing budget be?” Instead, you will say “It cost me $15.60 to create a new client who is going to be worth $872 to my business, over the next three years.”

It is simply an allocation of funds to a sale! (High probability of success.)

How often would you go to the Casino if you knew that you could not lose? Would it be every day? It’s the same here. Apply this strategy and you cannot lose. Do your sums – this is a science that produces a predictable outcome every time.

The mail order business is the most exact example I know of understanding the lifetime value of a client. We measure and analyse every ad and mail-out we do. We have no limitation on our budget, or our earning capacity for that matter. I would personally spend $200,000 per week on advertising, if I knew I could create a new client at break even, or make a small profit on our first transaction, because I know at least 5% of the people I attract to my business will buy everything I offer them.

They will become advocates of my business.

It is no different for your business.

Still not convinced of the power of this distinction? I shall do my best to convince you.

Lifetime Value of a Customer

Remember the lifetime value of a customer is equal to the total profit that a customer brings into your business over the lifetime of the relationship with your business.

Lets calculate a typical example. Lets say you have a shop and that you’ve tracked the number of customers who come into your shop. Every year you get 1000 new people to come into the shop and they make purchases , on the whole $20,000 worth of products – or $20 per person.
And lets also say that your average gross profit is equal to 35% of the selling price. This means that the $20,000 in sales from the first sale to these 1000 new people resulted in a gross profit of $7,000.

Furthermore, lets assume that you spent $3,000 on advertising, or $3 per person, in order to get these new people into the shop. In other words you made $4,000 profit or $4 after ad costs. As you can see, this is . . .

An easy, low cost way to get lots of new customers!

But wait! Let’s expand even more on this.

If you track those 1,000 new people over the next several years, you will find that, on average, they generate about $100 for year 1, $90 for year 2, $80 for year 3, $70 for year 4 and $60 for year 5. That’s $420 average per person over the next five years!

And at 35% average profit based on selling price, this represents $147 per person. This may not seem like much, but bear in mind that it costs you $3 in advertising to get this new customer and that customer represents $147 in profit to you.

This is the Lifetime Value of each new person: $147.

Remember that we are working on averages here. But over the 1,000 new people who come in, you will make a total profit over the next five years of . . .

$147,000.00 ! ! !

Not every one of the 1,000 new people who walked through your doors buys something . And not everyone who buys something will come back again. But there are many people who buy something and return again and again and again! These are the people who make these figures work. These are the people who can make you rich. Treat them with respect.

Calculating the Lifetime Value of Your Client From Scratch

If you haven’t yet, here’s how to do it:

  1. Compute your average sale and your profit per sale.
  2. Compute how much additional profit a customer is worth to you by determining how many times he or she comes back. Be conservative.
  3. Compute precisely what a customer costs by dividing the marketing budget by the number of customers it produces.
  4. Compute the cost of a prospect the same way.
  5. Compute how many sales you get for so many prospects (the percentage of prospects who become customers.)
  6. Compute the lifetime value of a customer by subtracting the cost to produce (or convert) him/her over the lifetime of his/her patronage.

I ultimately want you to spend less per customer on acquisition cost ¾ so why am I trying to get you to spend more? Because this is the most lucrative short-term way to get all the customers you will ever need.

You may be thinking to yourself “This is all so obvious”, and I agree. Everyone wants as many new customers as they can get, but almost no-one quantifies precisely what a customer is ultimately worth and consequently, how much they can spend in order to get one and still be efficient and profitable.

The areas into which you can sink marketing dollars can easily be sales people, direct mail, trade show exhibitions, or whatever is the most productive way to get new customers.

Shining Example

A shining example of one sector of an industry that is “waking up” to the wind-fall profits that lie hidden in the lifetime value of a customer, is private hospitals.

I can personally vouch for this, because only a week ago, I had a very short stay in The Mount Hospital, to undergo knee surgery to correct an old problem. From the moment I walked in the door, I knew my experience was going to be ‘different’, for a start there was a distinct absence of those big, ugly counters (barriers) separating me from the receptionist. Instead, I was ushered into a beautiful flower filled foyer where comfortable club chairs and lounges provide the seating.

No waiting in queues either, as I was efficiently directed to waiting staff and more comfortable club seating, to find, to my surprise, all my paper work completed and only my signature required along with the answers to a few short questions!

The next thing I knew, I was being escorted all the way from the reception, four floors up to my pleasantly appointed room, by a lady who’s smart outfit looked more like that of a legal secretary than a nurse. Not one of the staff members, nurse or official, was dressed in the traditional type of uniform I was accustomed to in a hospital environment.

In my room, I was given instructions on how to “drive” my remote control bed, the TV unit – including in-house movies, and on making phone calls. (No charge for the TV, the movies or for local phone calls). The last time I stayed in this hospital, I had the usual thermometer in my mouth and regular manual blood pressure measurements taken.

Not this time. I had a small device placed in my ear for two seconds, to record my temperature and a finger ‘clip’ which took my blood pressure.

Do you get my drift? I could go on and on. I found one surprise after another and as I was driven away from the hospital after being discharged, I turned to Pam and said “You know Love, I feel like I just stayed at a 5 Star hotel – being treated as a client rather than a patient”.

Of course, I refer to the private system here and I enjoyed “top” hospital cover. However, regardless of the level of my cover, which has remained constant, the whole experience of this last visit to the Mount Hospital, leaves the previous one (for surgery to the other knee) in the dust in terms of service, comfort, convenience and added value.

Guess where I recommend you go if you are faced with a trip to hospital!

Another classic example of the power of this strategy:

This works for anyone who employs sales people, but it is particularly good if you have reps on the road.

Lets examine the usual scenario for this fictitious wholesaler, who has a gross profit of 35% of the selling price.

$200 x 10 x 5

Average sale per call per year number of years = $10,000 (35%GP $3,500)

So the question is, what are you prepared to give away on the first transaction, to guarantee you a gross profit of$3,500 per client over 5 years?

I would give away my profit of $70 on my first average sale.

Here is how my proposition to my sales force would go:

“For every new client you make a sale to, I will give you all of my profit (on average $70). But you can only collect, if you maintain your existing clients at their present level of sales”. . . with such a proposition, you ensure sales people don’t ignore your existing clients to chase the big $$$ only.

You could even make that proposition to your clients as an incentive to purchase. Either way, you are giving away something you never had.

Can you see the power of this strategy? Please try it!

Back-End Selling

Of course the key to determining what a customer is ultimately worth to you is the extent of your back-end or ancillary sales to them.

You may have already worked out the number of times a customer will repurchase without being prompted to do so. But have you considered how much the value of a customer would increase if you actively solicited them over and over?

Step one is to up-sell or re-sell right at, or immediately after the initial sale and most preferably at the point of purchase.

Then if you can get them to add another item or service that is synergistic to the one they’re buying, you can dramatically improve the net profit.

Experiment with add-on products or services.

Offer a package of related items for a 40% discount if they buy it now.

Contact or visit a customer right after the sale to see how they like their purchase and offer them a deal on a related product or service. One out of every three customers might take you up on it.

Upgrade the sale by cutting $100 off for example, a superior version of what they are buying if they upgrade now.

Upselling is only one of the many different techniques.

Secure the rights to high profit or repeat-type products or services that are logically suited to your new customers, then follow up with calls, visits or mailings to sell those other products.

For example is you sell real estate, all you get is your share of the commission, nothing more. But you can set up a relationship with a quality furniture company that allows you to offer your buyers a discount, with 20% of the profits going to you.

Then set up a deal with a renovator for 20% … or a carpenter … or a pool cleaner … or a Landscaper – there are innumerable possibilities.

If you sell something else to 50% of your real estate customers, you could add thousands of dollars in profit to every sale.

Once you know how much extra income you can earn on the “back-end” you can dramatically expand or increase the amount of money you spend advertising houses for sale. You can justify spending a lot more time and money cultivating your customers ¾ since they’re no longer worth just “X” dollars, but rather they’re worth “X” + “Y” dollars.

If you don’t want to push other people’s products or services, you can turn over your leads or prospects to other companies whose products or services are compatible and take a flat fee per lead or percentage, albeit less than if you did it yourself. This quickly increases the lifetime value of a once only customer.

If a customer is worth only $20 more, that’s $20 more than you can afford to spend to get other customers, which can build a pyramid of profit with an expanding customer base.

Perpetual Reselling and Cross-Selling

If you have a consumable, repeat-sale product or service, set up a regular monthly, quarterly, contact strategy, based on testing.

Lets say you have a product or service your customers should replace two to six times a year. You could send out a letter every month or quarterly, in which you acknowledge their importance to you as preferred or valued customers.

Tell them some of what is going on in their industry or in your business and make a preferential offer to them ¾ a better price or a special combination package not available to new customers.

Be the first to approach them about new products or merchandise you are willing to reserve for them, if they call you, come in or send you back the card.

By “working” that customer and repeatedly communication with him/her, you can stimulate more repeat orders.

How many more orders? Every situation is different and you must test various approaches to find the one(s) that get the best results, but by regularly “working” your customers, you can usually pull from 20% to 300% additional business. People are silently begging to be acknowledged, informed, given advanced opportunities and led to action!

It doesn’t matter what business you are in, this concept works equally well anywhere. If you’re in retail, a letter is great. (Please see example of one of my letters that pulled in $25,000 worth of extra business in one week.) If you have a handful of expensive clients, give them a call. You can use a fax, a cassette tape, a card or a gift bearing an offer.

The point is, follow up and test new versions against your control approach. There will be more on this approach in newsletters to follow.

Borrow Things

It is also foolish to waste energy trying to reinvent the wheel. There are many ways to “pick people’s brains” ethically. Ie:

  1. Visit lots of businesses and let them try to ‘sell’ you on their product / service. Watch the way they approach you, their sales pitches, their offers, guarantees, how they follow up and attempt to cross-sell etc. You might want to adapt some of these techniques.
  2. As you observe all the things they do, look carefully at what they DON”T do. As they aim their sales pitch at you, make note of how they fail to compel you, convince you to buy from them etc.
  3. Call a successful company involved in the same industry (not someone who is within your competitive environment) and ask for the director/owner. Tell them who you are, and that you have respect for their achievements, and would like to learn from them. Seek their permission to ask some questions of their marketing personnel. At the same time, assure them that you are not a threat. If you offer to take them to lunch or even make a donation to their charity in exchange for their favour, you may be surprised to find them very open.
  4. Run ads in the classified ad section or in trade journals, which actually announce that you seek ideas/concepts you can use in your own organisation. You may even offer to pay the submitter a percentage of profits generated, or even a flat fee for anything accepted and used.
  5. Make an offer to your own employees. You might offer them 10% of all increased profits for 12 months, on each great marketing idea they produce.
  6. Talk to and interview marketing, management and advertising consultants whose ideas inspire you. You will come away with a multitude of ideas.
  7. Make the commitment to read at least one marketing, sales or advertising book per week … then read the good ones again and again and again.

And why is this such a good idea? Because most of these books are written primarily to satisfy the ego of the author, or with the aim to get new clients . . . not just for the money. Your own creative processes will be stirred by what you are reading. It’s likely that the author has spent decades mastering his craft and all that experience is squeezed into three years of writing about it.

Other Ways to Pick People’s Brains

  1. Go to trade shows, if only to expand your awareness.
  2. Subscribe to trade publications outside of your own area.
  3. Read such publications as The Financial Review, and others pertaining to marketing.
  4. Have a good look at Yellow Pages Ads and apply the good ideas to your own business.

Get some leverage out of the things suggested that you do undertake, by delegating projects to people within your organisation … one monitors the ads, another might interview applicants etc. Have a regular brain storming session based on their findings. Get them to present the most feasible ideas.

Look Upon it as an Adventure for Your Lifetime!

When you really decide to exploit the potential of your business, you are entering the profitable adventure of a lifetime. From this point, you can commit to trailing as many back-ending, cross-selling, joint venture and sales packaging concepts as possible. Approach every such exercise with humilty.

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