Is He Worth It? Understanding a Customer’s Value!

Figure out what a customer is worth to your business!

This is an area of business that many entrepreneurs overlook but it is important when we think about marketing, budgeting or just about anything related to how your business works.  Here it is:

What is each customer worth to you over his lifetime?

You may ask yourself what is the big deal?  Here’s why – it will help you determine how much you might want to spend to get a new customer.  Does this make sense?

Another thing it helps you realize is how much it costs you if you lose a customer!  It also helps you put together a marketing budget in a realistic way so you are not just making random decisions without thinking about what your return should be.

So you are thinking – yeah this is all great but I am no math genius and don’t have time to figure out how to do this technical stuff – so now what?  Here is a simple way to compute the value of a customer and it goes like this.

1.    What does a customer spend with you each month?
2.    What is the annual spend by that customer [take your answer in 1 and multiply by 12]
3.    On average how long will you have this customer – think in terms of years providing you are giving him good service.

Congratulations you now have an idea what a customer is worth to you!  The gross number that is.  Now you have to think what is it worth to you to get a new customer or keep a current one happy.  See how it changes the way you think?
So let’s look ‘Joe’s Pizza’ – our local pizza restaurant and put together his plan.  Joe figures the average customer spends about $60 per month on pizzas, that works out to be $720 per year in sales, and they will shop with him for eight years before they move out of the neighborhood so this totals $5760 over the course of eight years or the customer’s lifetime.  Do you see the value of what a customer really is?

If you think about it this way — you will have a better handle as to how to market to your customers and where you want to spend your dollars moving forward.

Next time someone asks you if it is worth it you will really know if it is or not!

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