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The lifetime value of a customer/client/patient is one of the most valuable things you as a business owner can know. It is a measure of value of the customer to your business. In other words, it is the total profit of an average customer over the lifetime of his or her patronage – including all back-end sales less all advertising, marketing, and incremental service fulfillment expenses. Example: (numbers rounded to keep calculation simple) Let’s say that your average new customer brings you an average profit of $100 on the first visit. He or she purchases ten more times a year, with an average profit of $75 on each visit. Now, with the average patronage lasting two years, every new customer is worth $1,600: {$100 + (10 x $75) +(10 x $75)} = $1,600. Why is this calculation so important? By knowing what the value of an average customer is, you can then determine two things: How much you can afford to spend to acquire a new customer? How much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor? Just what is the value of a customer who stays with you for a long time? Tom Peters, a well-known business guru, says that every time a Federal Express courier comes into his office, the driver should see $180,000 stamped on the head of the secretary. Tom’s small firm of 30 people has a $1,500 a month courier bill. That’s $18,000 a year times ten years for a total Lifetime Customer Value of $180,000. And if the secretary convinces just one other customer to start using the service, the value doubles. But most mail couriers think that the value of the customer is just the $13.95 they spend today. Each of your customers is worth thousands of dollars if you’ll take care of them. The first one is this: If the Lifetime Value of a customer is $1,600, how much can you theoretically afford to spend to bring a new customer in and still break-even? Depending on the profitability of your business, the answer is up to $1,600. This is an important number to know as you make important business decisions on what advertising medium to advertise in, how to compensate your front office staff and what fees to charge for your services. The second lesson is that the key to keeping customers is to develop a long-term relationship with them. A customer on your database is not just a name. It’s a real person with changing and evolving needs and wants. They are being constantly bombarded with a hundred other options. You need to do whatever it takes to keep them loyal to you…and keep them out of the competitors reach because the Lifetime Value of each customer is so great. A CUSTOMER SERVICE BREAKTHROUGH: Determining the lifetime value of a customer for the first time usually shocks many business owners. If the value of one customer is so high, do you think this would change how you treat each customer? Would you be willing to go the extra mile to make that customer happy? Many business owners frantically work at bringing in new customers while they neglect developing the “acre of diamonds” at their doorstep represented by their customer list. I suggest you put the lifetime value of a customer figure on your wall for you and your employees to see. Let it be a constant reminder of how important each and every customer is to your business. It has been said , “Sell the sizzle, and not the steak.” I say, Sell the sizzle BUT DELIVER THE STEAK! AND the salad AND the hors d’oeuvres AND the dessert AND the limo ride to and from the restaurant. Take care of your customers, there’s a huge bounty on their head! Salim Omar, author of “Straight Talk About Small Business Success In New Jersey”, specializes in providing accounting and tax services to business and practice owners. Readers of BizEd Guide are entitled to a free, one-hour consultation with Salim. (Valued at $175. Only limited slots set aside, so call now) Email Salim@Omargroupcpa.com or call (732) 566-3660.
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