What’s a customer worth to you? It’s a really interesting question that’s more complicated than it first seems – sell a £40 ticket to a speaking event you’re running and it’s tempting to say they were worth £40, but what about the long-term positive impact of them coming back in the future, keen to see what other insights you have, or the negative impact of the costs you put into the event in the first place?
Every customer starts with a negative value – the cost of acquiring the new customer, and that needs to be accounted for. But, as they come back with repeat custom, their value increases and that initial investment pays off.
Knowing a customer’s value – or what a customer is worth to you – will help you create sustainable marketing budgets.
It matters for your business. Do you want to know more?
Understanding Customer Lifetime Value
One important metric is Customer Lifetime Value (CLV).
It represents the amount of income you can expect from a single customer over their lifetime of coming to you.
Imagine this coffee shop as an example. Here, a customer comes twice a week, spending £5 each visit. Their value isn’t £5 for the coffee, or even £10 for the week – think long term. Using historical data, you can predict future spending. People tend to be loyal to their favourite coffee shop, so it’s possible to predict that £10 weekly spend for many weeks to come.
CLV = Average Transaction Value x Average Purchase Frequency x Average Customer Lifespan
In our coffee shop example, the customer’s transaction value is £5 per cup, 2 times a week (or 100 a year). For potentially five years, that’s £2500; retained for ten years, it’s five grand.
Customer Lifetime Value and Customer Acquisition Costs
The next thing to consider is Customer Acquisition Cost (CAC) – that’s how much you spend attracting, converting, and keeping your customers.
Understanding the CLV from the above section will help hone the CAC. Let’s jump back to the coffee shop.
If we add in a loyalty scheme where they get one free coffee for every ten they buy, that means for our example patron, they get a free drink every five weeks or, put in financial terms, you give them £5 every time they spend £50.
You’re putting in 10% as the customer acquisition cost in this example – and you’re doing it after the fact, which is a lot easier to stomach than investing early before they are your customer.
But this loyalty scheme is unlikely to be the only factor in your CAC. Consider the following:
- Advertising
- Your website
- Flyers and printed information
- Sales staff wages
- Public relations
- And more…
All of this can be calculated to produce a comprehensive marketing budget.
Determining Your Marketing Budget
Your marketing cost is the total of all those mentioned outgoings. Rather than just throwing more and more out there in the hope of acquiring and retaining customers, you can use CLV and CAC to create a strategic marketing budget.
When you know the value of a customer, you can make decisions about what to spend acquiring and retaining them.
And it can be a sliding scale – you can use a higher marketing spend to acquire higher value customers. In our coffee shop example, this could mean targeting nearby businesses whose employees are likely to spend more getting food and other extras as well as their morning caffeine hit. Creating a specific campaign to draw people in from a targeted area can be a very worthy investment with strong conversion rates.
The Importance of Customer Retention
Maximising the lifetime spend relies on your customer staying with you for a long time – this is why customer retention is essential. Retaining a client costs far less than acquiring one, so focus on this, too!
There are a few things needed to retain your customers:
Customer service
Making sure they’re happy when they interact with you or your staff will mean they keep coming back, and the inverse is even truer, as nothing loses a customer quicker than a bad customer service experience.
Quality products and services
If what you’re selling them is good, they’ll come back. Low quality goods may make greater profits in the short term, but you’re not going to keep your customers and will forever be seeking new clients.
Reliability
Knowing they can come back for great goods and service time and again makes new customers into long-term investments.
Credibility
Being trusted in the industry helps keep the people you have coming back; plus, they’ll bring you new customers through recommendations.
When your customer stays with you, their lifetime spend increases and all that money and effort spent getting them in the first place really pays off.
The Long-Term View
Every customer you have is worth more than the profit of a single transaction. By understanding their lifetime value, the cost of acquisition, and the value of retention, you can really transform your marketing.
Talk to me, Nathan Littleton, to discuss the ways you can maximise your customer value and get the most out of every one.
