Lifetime value is how much a customer is worth to you over the entire period that they will do business with you. For example, if your average customer spends R200 every time he or she makes a purchase from you, and that customer will typically make one purchase a month and do business with you for five years, their lifetime value is as follows:
R200 x 12 months x 5 years = R12 000
Business owners can effectively boost their profits and the sustainability of their businesses by increasing the lifetime value of their customers. The trick is to change your focus from the single sale now to understanding the idea of lifetime value.
For example, let’s say you embark on a campaign to generate new sales leads that costs you R10 000. You get 200 new leads from the campaign. Effectively, each lead has cost you R50. Of these leads, 80 become customers, spending an average of R500 with you twice a year. Your average customer lifetime is two years.
That means that the lifetime value of your customer is R2 000. With 80 new customers spending R2 000 over their customer lifetime period, your campaign has generated R160 000.
And that does not take into account the fact that those 80 new customers might bring you referral business. If 10 of your new customers tell just one friend who buys from you, that’s an additional R20 000 worth of business of lifetime value, which means your campaign has generated R180 000.
You see, it’s not just about the people that your campaign attracts, but the profit you will make from them and their referrals over the course of several years. It’s not about market share — it’s about wallet share. Instead of trying to get the biggest slice of the market, business owners should focus their attention on increasing the amount of money they make from each customer, over a period of time.
The critical thing is to turn each customer into a lifetime customer. And the way you do that is through customer service, building customer relationships and focusing on generating repeat business.
The truth is that many businesses require customers to make a second purchase before they break even (e.g. if it cost you R200 to acquire the customer and she only spent R100 with you the first time she did business with you). Repeat business is the sure way to profit. And the fact is that it’s up to six times less expensive to sell to an existing customer than acquire a new customer.
Type of business
Obviously, your customer lifetime will be different depending on the type of business you run. If you sell cars, your customers might buy once from you every five years, but over a period of 20 years. In that case, you can increase your lifetime value by using car services or add-on products to generate additional repeat business.
If, on the other hand, you run a quick-service restaurant, your customers probably purchase far more frequently, but for a lower value. You might attract additional repeat business by introducing a loyalty programme where customers get their tenth meal free.
Whatever the case, you can boost your profits by finding customers who will be with you for the long term and ensuring that you take good care of them.