07/29/13

How Much Is A Customer Really Worth?

Lendio Blue SneakersThis is probably one of the most important questions a Main Street business owner should ask him or herself.

A few months back I mentioned that I’d reconnected with an old brand—PF Flyers. Until I had laced up my first pair in probably 40 years, I never thought I’d be wearing the retro sneakers, but I am. Four different pair of sneakers later, I’ve come to appreciate the style and comfort of these shoes and my value to the company has probably increased beyond what they might have expected—as the only marketing I ever see from the brand is a fairly regular email with the latest specials. Earlier in the spring, I actually bought a pair in response to a special promotion and now have a pair of Lendio blue sneakers that I’m often wearing around the office. And, I’m waiting for a t-shirt that sports the logo to arrive in the next few days.

Have you ever considered the lifetime value of a customer? If you haven’t, you should.

Having spent a large part of my career in sales or marketing of one stripe or another, I have to admit, I’m puzzled by the short-sightedness of some of my professional colleagues around the country. Companies often divide the sales force into teams that basically fall into either “hunter” or “farmer” categories. They mistakenly associate the killer instinct of the folks in the “hunter” category as the driving force behind what makes a good salesperson. I’m not sure I agree. I think all salespeople should be farmers.

Farmers look beyond the short-term objectives of closing the sale today, and look down the road a bit. They might not articulate it this way, but they’re looking at the lifetime value of the customer and understand that over-promising today may close the sale today, but hurts the next sale down the road.

How do you calculate the lifetime value of a customer? It’s a pretty simple, yet very important formula:

Initial purchase + (average purchase x number of purchases per year) x number of years as a customer = lifetime value

For example, let’s say we visited a new restaurant and enjoyed our lunch. To make it simple, let’s say lunch cost $10. I think I like this place and visit there at least once a week for the next five years. The formula would look like this:

$10 + ($10 x 52 weeks) x 5 = $2610

Thinking in terms of the lifetime value of a customer completely changes the way many Main Street business owners look at their customers. This formula doesn’t just work for restaurants or barbershops either. It applies to any business. “Hunters” may close the big deal, but cultivating the relationship (just like a farmer cultivates his or her field) turns big deals into long-term super customers.

Next time a new customer calls on the phone or walks into your place of business ask yourself, “What’s the lifetime value of this customer?” You might be surprised at what you do differently.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

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