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This blog continues my discussion relative to customer value. I urge you to read the previous blogs about this topic — for both franchisors and franchisees. Here’s where you can find them:
Read these past lessons first
- Franchisors: What Business Are You In?
- How Much Did That Franchisee Cost You?
- Franchisor: What’s The Value Of Your Franchisee
- Franchisors: How Many Franchisees Are You Keeping?
- Helping Franchisees Recognize The Value Of A Customer
What is the value of a customer?
There’s a lot of confusion among franchisors and franchisees — among business owners in general — about the value of a customer.
While at first glance it appears to some that a customer is only worth one transaction, or one transaction at a time, that’s missing the bigger picture and the bigger opportunity.
Can you keep a customer for a lifetime?
Why not capture and keep a customer for a lifetime?
It’s do-able! And many franchises get an A+ in this category. Which basically explains the reason for satisfaction and profit in those businesses.
You may not be in love with your business, and you may not sell the world’s greatest product or service, but if you pay attention to what customers want, you’re likely to keep most of them for a lifetime.
How you build a satisfying and profitable business
When you do that, you’ll have a highly profitable business, which usually generates a high level of satisfaction, too. It’s all about owning a business that is both profitable and satisfying.
Another time we’ll talk about paying attention to what customers want so that you can keep them for a lifetime. Today’s lesson focuses on calculating the lifetime value of a customer.
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To make this lesson really easy for you, I’m providing a form — at no cost — that you can access and use repetitively. Click here when you’re ready to access the form. I only ask that you remember where you got it, and that you do not remove my copyright. I am granting you permission to duplicate the form and use it as needed. If I consult with you on this topic, I’ll ask that you provide me with a completed form.
Here are the 8 steps to complete the form:
- Calculate the average value of a sale to a customer. Add up all your receipts for a day and divide by the number of unique customers. That’s your average value. Probably best if you use monthly or quarterly numbers.
- How many times does the same customer buy from you in a year? Sometimes difficult to know, but you’ve got to figure it out. Until you know, take a good guess.
- How many years does the same customer buy from you? Don’t give up! I know that seems like an impossible number for you to calculate, particularly if you’ve only been in business for a a couple of years. The average retail customer in America buys from the same business for 7 years. Use that number if you need to.
- Calculate gross annual sales by multiplying your answer on line 1 by line 2.
- Calculate customer lifetime value by multiplying your answer on line 3 by line 4. Now you know your customer’s lifetime value.
- But wait, there’s more! The real value is even greater. How many customer referrals do you get annually from the same customer? Don’t know? Find out! If you want to maximize your customer value, you’ll calculate that number. You may need to ask customers: How did you hear about us? (You should be doing that anyway). Know how many new customers you get each year as a result of one customer’s referral.
- Calculate the gross sales from referrals. Multiply your answer on line 5 by your answer on line 6.
- Add the numbers on line 5 and 7 and now you know the maximized gross customer lifetime value! It’s a very important number.
Maybe the most important number in business
It’s an important number because you may be spending more to capture a customer than you’re earning from the customer! Of course, that’s probably not the case if you keep a customer for a lifetime, or at least a long time.
It’s an important number because it shows you that it’s worth investing in capturing customers! Sure, it may cost you $100 to capture one customer, but that customer may be worth $10,000 or more to you over a lifetime. That’s a transaction worth doing over and over!
Got good news and bad news
Here’s the bad news and the good news. I always like the bad news first. If it’s not cancer or death, I figure I can overcome it!
The bad news is that you are not maximizing customer lifetime value. In fact, you’re probably losing more customers than you’re keeping. You probably lose at least half your customers every year! Horrible, isn’t it? But that’s how well the average business performs in America. If you’re better than average, good for you, but you’re still losing customers, which means you’re losing money.
It’s not expensive to keep customers longer
Now the good news is pretty good. For less than what it costs you to capture a customer, you can implement some techniques to keep a customer, possibly even for a lifetime, or for 3 to 5 years. Remember, it’s do-able. There are businesses that keep the majority of their customers for many years. You can, too.
And we’ll discuss some of those ideas in future blogs and seminars. For now, figure out your maximized customer lifetime value. I’ll look forward to hearing about your experiences — and I won’t mind at all if you thank me for pointing out one of the most important numbers in your business strategy!
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