To know how profitable your marketing is, you need to know the lifetime value of your customers. This is the average profit you earn from a customer over their lifetime.
Take a mechanics garage as an example.
If the average new customer brings their car in three times a year and spends £200 each time and half of this is profit, this makes the annual value of that customer £200 x 3 x ½ = £300.
If we know that on average we are going to be able to sell additional items to the average customer once a year of an MOT and Pre Winter Check Up with profits of £50 this makes the annual value now £350.
But the average customer also introduces one other customer to your garage once a year that is also worth £350 to you over a year. Therefore the annual value of the first new customer is really £700.
More than that, you know a new customer stays with you on average for 5 years, so this makes the lifetime value of the customer £3500.
By knowing the lifetime value, you are in a far better position than your competitors. If you now know the true value of the average new customer is £3500, not the original £75 profit on the first sale, how much are you prepared to pay for a new customer?
You’re likely to be prepared to pay a lot more than your competitors who don’t understand lifetime values.
Being able to spend more puts you at a competitive advantage. But only if you know the lifetime value can you work out how much you would be prepared to spend.
You now have the ability to increase your cost of getting the customer to a level where you make it irresistible for your prospects to say no.
This could include buying them with a free initial service, spending more on your advertising, etc. What’s more your competitors will think you are crazy because they don’t understand lifetime values.
A great example of this is buy 5 CD’s for £5 to get you hooked in as a customer, which is a loss leader offer. The basic idea is to break-even on the first sale and then break the bank.
If a new customer costs the garage £110 to get, they should do a lot more of that marketing activity because it is very profitable but their competitors may think they’re making a loss and they would have made the mistake of stopping this profitable activity, keep on doing it until it no longer makes a profit.
Naturally, you need to watch the cash-flow because it takes the lifetime of the client to generate this profit but if you’re sensible, can you see how much more opportunity recognising the lifetime value of a customer gives you?