How much is one customer worth to you, and why should you care? Whether customers are one-off visitors, or lifelong patrons depends largely on the type of business and the experience the customer has at that business. A restaurant is naturally hoping that the same people visit over and over, and spend a significant amount of money at the establishment over the lifetime of their visits. A mattress retailer, however, may only sell one or two mattresses to a customer over the course of their life. Either way, marketers should know the value an average customer brings to a business over their lifetime, as this can provide insights to marketers into how much should be invested into acquiring and keeping customers. Did you know, Starbucks puts a lifetime value of a customer at over $14,000! Every business will have a different value but the amount is usually a lot higher than what a business owner or manager would guess, once you factor in referrals, reviews and star-ratings.
This is a simple calculation for working out customer lifetime value. There are other calculations more complicated than this, and advanced businesses will use more complex calculations and average each of those for a far more accurate number. However, this is a good place to start for a small business that has no idea what each customer is worth.
Step 1: Use the average of at least five customers (but more if possible) and determine average spend per visit, the average visits per week, and therefore the average spend per week (value a).
Step 2: Determine how many years on average a satisfied customer would visit for in their lifetime (value b). A ‘lifetime’ in one business might be 5 years, but 20 in another. For example, an indoor play park for under 10 year olds might see the same family for 10-15 years before all the kids have outgrown it.
Customer lifetime value calculation: 52(a) x (b)
For example, Jim and Bob like to lunch together every Friday at their favourite lounge near the office. Each time they visit, the combined bill is about $100. One day, Jim’s food is not up to his standards and he complains. The owner offers him an alternative and does not charge for the meal, but he is clearly unimpressed at the complaint and makes Jim feel very uncomfortable. Jim wasn’t looking for a free meal, he was looking to be heard, to be valued, and ultimately treated in a way that would keep his custom. Jim continues to lunch with Bob every Friday for a further two years at a different restaurant up the street until he changes jobs.
That one bad experience cost the restaurant $10,400 in revenue from Jim and Bob. If the restaurant owner had a better understanding of the value that Jim represented to his restaurant, he probably would have thought twice about how he reacted. Jim is not socially savvy online and does not use social media platforms. But imagine if he had written a negative Google review or told people on Facebook about his experience. For every one person who reads a negative review and decides not to visit, that’s another lost potential lifetime customer.
Knowing this number and taking it into account is extremely valuable for small business owners, not only when deciding how to react in a moment when someone makes a complaint, but also when making a marketing budget. Once you know how much a customers brings into the business over their ‘lifetime’, marketers know how much at a maximum they can invest in acquiring and keeping that customer.
What’s your customer lifetime value? Can you risk losing them?
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