Do you know what a customer is worth to you?
Customer lifetime value (CLV) is so simple and so important. Yet many businesses fail to measure it.
In this article I’m going to explain how understanding your CLV can help you dramatically grow your business. More on that below, but first we need to understand…
Some simple maths
Let’s assume that on average your customers spend $50 a sale with you. They buy on average 6 times a year. And they stay a customer for 3 years.
The revenue that your average customer is worth is:
$50 x 6 x 3 = $900.
And let’s assume that your profit margin is 30%.
$900 x 30% = $270. This means that every new customer you bring into the business, on average, will result in $270 in your back pocket.
So how could you use this information to feed business growth?
Your new perspective on customer acquisition
Many businesses have a limited perspective on marketing and advertising. They see it as a cost. But when you see it as an investment, powerful competitive advantages can reveal themselves.
Consider looking at your marketing and advertising as an activity in ‘buying customers’. How much would you to invest to buy a new customer?
It’s an easy calculation if you know that on average, each customer is going to put $270 in your pocket.
Let’s say you discover the largest and easiest to attain source of new customers comes at an average cost of $180 per customer. Depending on your industry, you might think that’s an outrageous cost… but if you know that spending the $180 will make you $270, you also know your return on investment is 50%!
This can be a paradigm shift in thinking, and…
A serious competitive advantage
Because in this example, if you’re in an industry that hesitates at paying more than $60 to win a customer, then you can out spend them by 3:1. This means you can acquire customers 3 times as fast as your competitors, seizing 3 times the market share in the process!
Then if you’re doing a great job on the backend, you are growing your average spend per sale and average purchase frequency. This improves your CLV, giving you more profit, letting you crack up customer acquisition. It’s a virtuous circle.
Bottom line – you should be willing to invest in an unlimited number of $180 customer acquisitions, as long as they continue to return you $270!
Never set your marketing budget at a fixed cost, because it can seriously limit your growth.