The Lifetime Value of a Customer (both kinds!) It is a management function to determine the lifetime value of a customer. This information is then used to determine how much cost and effort should be expended to acquire and keep a customer. There are two different kinds of lifetime value of a customer.
The first is obvious - the repeat business and profits that he represents. The second is less obvious, but can represent much more value to you. The second is your customer’s referral value to you, for a lifetime.
1) Regarding the direct income from acquiring a customer, it is very important to measure the potential profits over time, especially since there is very little additional marketing expense to get repeat business from existing customers, if you know how to do it right. Most of the additional marketing ”costs” should be from providing super service or low cost added values, as needed. A restaurant, auto parts dealer, heating/cooling contractor, airline, lawn mowing service, cable TV provider or office supply store all have the same need to measure the lifetime value of a customer. If the restaurant is visited (or can be made to visit with good marketing) 12 times a year by a family of 4, that’s 12 x $25, or $300 per year, every year. If the gross margins are at 33%, that represents $100 per family per year. Twenty years of this is a $2,000 lifetime value per family. So, if it costs $10 to get them to try your product, that’s a pretty good investment (1000% annual ROI). The obvious assumption is that your ”value” is adequate, along with great marketing, to get them to return on a regular basis. Eight dollars margin on a $25 meal means that they will have to come back to break even. But, from visit #2 on, there are no more, or, very low marketing costs to get them to deliver more profits.
Direct mail to customers is a way to promote specials and get them to return. You can develop a customer list from business cards (that’s why there’s a bowl for business cards with a ”Free Drawing”) or an e-mail program or, a ”special club.” Heating/cooling contractors rely on repeat business from additional repairs because of happy customers, eventually making the bigger money when a unit must be replaced. The goal of this business, or any other business, is to ”keep them coming back.” Any effort that binds them to you is what reduces the risk of losing them to a pirate. ”Priority Status”, unique services, no overtime charges for maintenance agreement customers, added value for special regular customers, or ”coupons with our billing for our charge account customers” are all ways to lock them in to repeating business with you.
A second way for you to get repeat business is to entice them to patronize you more often. This can be done, again, with specials, seasonal offerings, unique products, once-a-year specials, or any marketing effort that can justify coming down to your place of business. Maybe you have new information that is useful to them; maybe the factory guy will speak; maybe there is a new use for a product.
2) The second kind of lifetime value, referrals, represents more potential business than the first, and as such, is difficult to predict or count on for business. However, there are no or very little marketing costs for referrals, unless you use one of the suggestions for developing referrals at a predictable level. This information can be found later in this book. The one-time-sale can even become a Lifetime Value because of its referral potential. I have seen businesses give away a product or service because of the referral value, or, sometimes more importantly, to get testimonials for a start-up business or new product line. Nothing has more credibility than a verifiable testimonial from a third party who has nothing to gain by the endorsement. “Proper Testimonials” will be discussed.
