Lifetime Value of a Customer

In any workplace one of the conversations you should be having regularly with your team is about the lifetime value of a customer and what this means to your business.

What do we mean by the lifetime value of a customer?

Here’s a simple example. Let’s say, for easy maths, customers of your local supermarket have an average weekly family shop of $200 for 50 weeks of the year (for 2 weeks the family are physically away on holiday). This means that the worth of this customer to the supermarket is $10,000 per year if the supermarket is in stock of what they should be in stock of, at a competitive price and provide a pleasant, efficient shopping experience.

If the average customer shops there for 7 years before the family moves on then the ‘lifetime value’ of the typical customer is $70,000 to this supermarket.

This means that if a customer has a gripe about some seemingly insignificant thing and the situation isn’t handled well, then the potential loss to the supermarket isn’t just the value of the shopping in their trolley that day, its $70,000!

If someone was worth $70,000 to your company, you’d treat them as special cargo, wouldn’t you? You’d treat them like royalty, like honoured guests. Well, they are and that’s what we need to keep reminding ourselves of every day.

Of course, the value will change depending on your business. The calculation will vary considerably for a hairdressing salon, a plumber, an insurance company or a café based on:

  1. The average purchase of each customer. For example, for a men’s hairdresser it could be $30, for a women’s hair salon it may be $150.
  2. The typical purchase frequency. For the men’s hairdresser it could be every 5 weeks, for the women’s hair salon it may be every 6 weeks.
  3. The annual value. So, that works out at $312 for the average bloke and $1,300 for the typical lady!
  4. The Lifetime Value of a Customer. This will vary by type of business and by geographic area. Sticking with our hairdressing examples, let’s say in each case it is 7 years. This means that the Lifetime Value of a Customer to our men’s hairdresser could be $2,184 and for the women’s hair salon $9,100.

Given the maths I’ve just explained here’s something to think of.

Over the years I’ve heard a common complaint about some women’s hair salons. Ladies tell me that new customers in some salons are fussed over and made to feel really special, like they are the star of the show. But once they become a regular they feel they are taken for granted and seem to get the apprentice doing more and the stylist less focussed on them. As a result those customers leave and go elsewhere.

Think of the money this hair salon is losing… and that’s before we consider the acquisition cost of a new customer – something I’ll explore with you in next month’s newsletter.

Visual courtesy of Shutterstock

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Jurek Leon is a storyteller, speaker and trainer. Subscribe to Jurek's FREE monthly 'Terrific Tips' e-newsletter at http://www.terrifictrading.com/terrific-newsletter/. Alternatively, email info@terrifictrading.com.