As a Direct Marketing Agency, We Talk About Customer Lifetime Value
Most businesses are looking for more customers. That’s logical. More customers means more business. Customers don’t grow on trees, and they don’t (usually) just walk into your business. You have to go get them! But many businesses don’t have a clue about what they should spend to acquire new customers. Part of the reason is that they have never stopped to think about what their customers are actually worth. As a direct marketing agency, it is our job to help our clients figure this out.
Some companies use complicated calculations to determine the lifetime value of their clients. But you can use a simple formula that will give you a pretty good idea of what a customer is worth.
Let’s say your average customer spends $100 each time he or she does business with you. And lets say customers do business with you an average of three times a year. So your average customer spends $300 with you every year. If the average amount of time you keep a customer is ten years that means your customer’s lifetime value is $3,000 ($300/year x 10 years = $3,000).
Here’s a key question: What are you willing to spend in order to gain a $3,000 customer? Obviously it doesn’t make sense to spend $3,000 in order to make $3,000. And it probably doesn’t make sense to spend $1,500 if it takes you ten years to make $3,000. On the other hand, if you pinch the penny too hard, you won’t have any customers to worry about. Too many companies have no idea what a new customer is really worth, so they don’t know how much they should spend to acquire one.
First, do the math. Then start looking for the most effective and cost-efficient way to reach those new customers.
Questions or comments about how to figure out what your customer is worth?