Do you know how much each customer is worth to your business?
Are you a little fuzzy on this?
Do you know these numbers?
The answer to this question plays an important part in whether you will grow your business.
I would say this one of the business concepts every business owner needs to get their heads around.
I know it's a big claim.
Let me explain.
When you know how much every customer is worth to you, then this changes the growth dynamics of any business.
This question forms the basis of Customer Lifetime Value Concept (CLV). Or as some people call it the Lifetime Customer Value (LCV)
I like CLV because it's based on the customer.
I sure you're thinking CLV sounds like another fancy pants term Accountants & Stock Brokers use .
There always wheeling out impressive words & acronyms to razzle dazzle you, with how clever they are.
- EPV - Earnings power value is a technique for valuing stocks by making an assumption about the sustainability of current earnings and the cost of capital but assuming no further growth...
- K-Ratio A ratio that is used in the performance evaluation of an equity relative to its risk...
- P-Value is the level of marginal significance within a statistical hypothesis test, representing the probability of the occurrence of a given event...
What the heck!...my heads spinning...
I could rattle 100's of these if I thought this might impress you. But I'm not going to insult your intelligence. To be honest, I don't use these terms, I'm not even sure I understand what half these actually do. I cheated I looked them up in a financial dictionary. Oh so clever.
I'm sure these fancy finance terms have there place or reason for existing.
So I'm not going to baffle you with these high tech financial jargon.
Here's the thing if you grasp the Customer Lifetime Value Concept (CLV). Then you will be able to pay as many Accountants & consultants to look up these words for you. If you can't think of anything better to spend your money on.
I would say, from my dealings with most Accountants they are not even aware of CLV. Or... If they are, then they have no idea how to even apply CLV to a business.
There more focused on costs & expenses, & where you have been. (Which is important but it's not going to help you grow your business.)
So do I have your attention Yet?
I hear you saying “Ok enough! What the heck is this CLV Customer Lifetime Value thingy anyway? And what's it got to do with me?”
Drum roll
Write this down.
Your Customer Lifetime Value is:
“How much every new customer spends with you over the Lifetime with your business...”
So what the big deal?
When you get CLV Customer Lifetime Value. It will help you make important business decisions on sales, marketing, product development, and customer support.
Most restaurants have tried a form CLV without realising.
You remember, when all those voucher entertainment books came out
You know the ones. buy One main & get another main Free.
Or similar types of deals.
These vouchers should have been a goldmine for restaurants. A lot of restaurants took them with disdain.
The problem is because they didn't understand the reasoning behind this concept. Most failed badly.
Most restaurants treated these as just a transaction rather than a chance to build a relationship and get ongoing customers.
So instead of trying to wow these people with phenomenal service & amazing food.
They were treated like 2nd class second citizens.
Squeezed into some tight corner, & given the waiter on training wheels.
The restaurant owners thought they were getting a dud deal. They had to give away a free meal. For What?
I’ve heard the restaurant staff say “cheap bastards” “How stingy”
So they missed the point.
They were looking at these people, treating them like they were an annoyance.
That’s why all those Groupon Discount sites came & went.
They did not teach you or show you why giving away a Free Meal was such a good idea.
Each new customers will catapult your profits by compounding the Customer Lifetime Value Concept...
Repeat customers put heaps of money in your pocket...
I don't want you to make the same mistake as these restaurateurs. Treating these new potential customers as an item on the Balance Sheet, just like an accountant.
So I don't confuse you with the complicated Harvard University definition, let me take this back a few steps. So you get this.
If I studied at Harvard School of Business then I could give you some mind altering algebra formula like this
Relax don't panic you don't even need this.
It's Ok to know this formula if you want to pass Uni Exam.
I would rather have a business that grows & makes heaps of money.
So if that's all right with you? I'm going to show why the CLV Customer Lifetime Value will change your business.
So let's dive in, with a little Business Marketing 101
OK?
“Business has only two functions -- marketing and innovation. All the rest are costs.”...“ Peter Drucker the father of modern business
So most areas in your business cost money But, Marketing makes You Money...
So we need to treat Marketing as an Investment...
If you were investing in the Stock Market then you would check to see how well your shares perform...
So without monitoring & reviewing you don't know if you're making money or losing money on your shares...
Without tracking, you won't know how your portfolio is performing better or less than expected to reach your investment goals...
Would You Be Happy to Invest in a Manager, Who Didn't Know or Even Check Your Numbers & How Your Portfolio is Doing?
No Way That's Just Dumb! - You might as well invest (gamble) your money on a nag at Flemington.
You Can't Manage What You Don't Measure...
So you need to know your numbers.
So If You're Going To Invest In Your Marketing, Then You Need To Know Your Numbers...
So this forms the background for CLV What's Your Customer Lifetime Value (CLV)?
What's Your Customer Lifetime Value CLV?
CLV is your projected revenue that your customer will generate during their lifetime...or
Your annual customer revenue X average life of a customer (in years)
When you know exactly what each new customer is worth to your business. You will know how much money you can spend on marketing to get that customer.
With each new customers you bring to your restaurant will immediately represent much more to your bottom line profits than you've ever thought possible.
How To Work Out Your Customer Lifetime Value
So we have to do a little bit of Maths
Warning Geeky Maths
BUT... if you get your head around CLV Concept you will be able to get More Profitable Customers...
How much money are your customers worth to you?
Let's look at the maths & assume we are running Bob's Gardening Services
Bob The Gardener knows all about Customer Lifetime Value //flic.kr/p/oAJwq9
So How much can Bob spend to get a new customer?
We'll make a couple assumptions for Bob The Gardener
