Lifetime Customer Value = Increasing Annual Profits
Sunday, February 12, 2012
Posted by: Barry Craft, Your Marketing Crew
Acquiring new customers is becoming increasingly difficult and more expensive than ever. With the current economy, many people have started their own businesses to compensate for a job they may have recently lost or to supplement their income. That means there are many new businesses competing for the same customer base. To make matters worse, the cost of doing business has increased with rising fuel costs, advertising and printing rates and other related overhead factors.
It is more important than ever to carefully analyze and track your marketing expenses to improve your overall ROI.
Increasing Annual Profits
Looking to increase your annual profits? There are three major ways of accomplishing that. The first is to get more customers. In a minute I will cover why that is the least effective method. The other methods are far more cost-effective and will help to increase customer loyalty and retention. One is to increase the average dollar value per sale; the other is to increase the number of transactions (sales) per year. Both of these focus on better using your existing customer base.
Let's put things in perspective the cost of acquiring a new customer vs. marketing to existing customers. We are about to get all mathematical here, so if you are not a numbers person you will probably want to run and hide. OK, I'm just kidding. If you are a small business owner, these are important metrics you need to know and use every day. Your marketing costs need to be analyzed and tracked carefully. You can't just wing it and expect to be profitable on a long-term basis.
Calculating Customer Acquisition Costs
Let's say you spent $500 for a small print ad in a local business directory or coupon book. First of all, that marketing campaign needs to be set in such a way that you know exactly which prospects and customers came as a result of that campaign. Refer to my small business marketing tips article that explains that concept in more detail.
Let's assume your $500 print ad produced five customers. Therefore you spent $100 each (customer acquisition cost) to obtain those customers. Many small business owners would say if the average net profit per sale was at least $100, then the campaign was profitable. That may be true, but even if the profit was less than $100 per sale, that campaign could still be profitable providing that you properly marketed those new customers for additional sales which could be acquired for much lower marketing costs and hence greater profitability.
Lowering Your Cost Per Sale
Let me reinforce the point that many small business owners might not be aware of or simply don't think about: A customer that has already purchased from you is far more likely to purchase from you again and the average dollar value per sale is usually higher. That alone will increase your profits because your conversion rate and average sale are usually higher. This is true because you already have an established relationship and people have a certain amount of trust that you will provide a good product and/or valuable service.
Calculating Customer Value
To determine the annual value of each of your customers, you need to review your billing statements.
If your average customer buys from you four times per year and the average sale is $100, you can easily see that customer is worth $400 per year. If you have been in business long enough and have been tracking your customers over the years, you should be able to determine about how many years each of those customers stay with you. For example if the average customer stays with you five years and spends an average of $400 per year, the lifetime value of that customer is $2,000. As you can see, increasing the number of sales or the average dollar value per sale, even by a small amount can add up over time. That is why it is important to understand this concept and implement along with your regular marketing strategies.
I hope it's now clear how important it is to use your existing customer base for increased profits and brand loyalty. New customers are an important component to an overall marketing strategy, of course, but I feel greater emphasis should be placed on optimizing your valuable existing customer database.
Barry Craft is founder and CEO of Your Marketing Crew, LLC. Please visit YourMarketingCrew.com/download-free-seo-ebook and get on the advance notification list to get the details of how you can get a copy of his new e-book, "Website On-page SEO Guide" for free.
Bonus! Barry is looking into developing a free tool to help small business owners determine such
things such as customer value and marketing ROI. If you're interested,
please visit his page about online marketing strategies
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of the page.