I know, I know…huh?
“Joe, I am not going to give away my house to start all over again trying to make a mansion.”
I don’t expect you to literally give away your house.
But if it was guaranteed to make you 100 million dollars you would do it, wouldn’t you? That is what we are talking about here, a concept known as…
The Lifetime Value of the Customer.
This concept is so critical to the future success of businesses everywhere, yet even some Fortune 500 companies are missing the boat big time. That is what I hate about lists like the 500…they mean absolutely nothing in the big scheme of things.
Any one of those companies, under the right circumstances…
Can fold up like a tent, and get packed away in a suitcase.
But this post is not a rip on the big 500 companies in the world…because some of them do “get it.” They understand the lifetime value of the customers they serve.
So why put your business at risk? You probably don’t have the resources that the big guys do to stay in business even when times are tough, do you?
So, here is the concept in a nutshell…
Every customer of your business runs through a certain buying cycle…or lifetime. This is the cycle where a customer considers your offerings, responds to your follow up marketing attempts, and purchases or invests in all of the possible offerings you have that fits their needs.
When this cycle finishes, the customer no longer needs what you have to offer, and does not purchase from you again. In some cases, this cycle does not end until the customer’s life actually ends (real estate for example, if the agent does his/her job).
During this lifetime…there is a certain number of dollars purchased. Figure out what this dollar amount is, on the average, and you have the key in your hand to business success.
Let’s create an example (sorry, it’s from the offline world, but applies here too).
Two general automotive repair shops, in the same city, have the following similar stats:
1000 customers in their database, averaging $300.00 per each transaction.
The top 20% of each automotive shops customers average 3 visits a year. That is 200 customers visiting three times each, or 600 visits from the best customers.
So, at an average transaction of $300.00 each visit, that is $180,000 annually from the top 20% of the automotive business.
The average length of time each customer in the top 20% stays is 10 years. Then, the customer either moves from the area, gets another car and switches to the dealership etc… The lifetime of the customer ends at 10 years.
So…each customer in the top 20% spends an average of $900.00 in three visits per year. At the end of the lifetime of the customer…these customers spend $9,000 each.
And that is important.
Knowing that information, that a customer in the top 20% of your business spends $9,000 with you by the end of 10 years…
You have to do whatever it takes to acquire and keep customers initially to ensure you get your $9,000!
What are you doing in your business to acquire customers? Is it the same “ho-hum” stuff that everyone else in your industry does, or do you have the “stuff” in you to separate your business from the pack?
Let’s return to our example, and make a comparison.
Automotive Repair Shop A takes this information and does what everyone else does with it…keeps doing what they are doing. They are out of business in 10 years or less, period.
Let me repeat that, they aren’t just growing slowly, they are out of business in 10 years or less. In this hyper-competitive business world, where more than 80% of small businesses FAIL in less than two years…it is an absolute.
And the really scary thing is…90% of the business owners who read this post will do nothing with this information, absolutely nothing.
But what about Automotive Repair Shop B?
Automotive Repair Shop B sends out a regular mailing to keep in touch with its customers. They do an important bit of math though, that separates them from the rest of the pack…
They figure how much they want to invest in every customer of their top 20% to get their $9,000.
This is critical. So what does Shop B actually do that keeps them separated once they have figured out what they want to invest?
To acquire customers, shop B sends out a new customer mailer that offers 4 FREE oil changes.
Total cost (remember, this is cost, not retail) = $60.00 per customer.
To double the effectiveness of that mailing, if the customer refers one more customer to take advantage of the same 4 FREE oil change offer…the original customer gets an additional FREE oil change…for a total of 5 FREE oil changes.
Total cost now = $75.00 to acquire two customers plus another $60.00 for the second customer’s four oil changes.
Total cost for two, $9,000 customers = $135.00
So…how many times do you want to trade $135.00 for $18,000 over 10 years?
“But Joe, you moron…now I have to keep a customer for 10 years to gain that serious advantage!”
To which I respond:
“Uhhh, yeah. You didn’t get into business to lose customers, did you? You do know that is much less expensive to keep customers, than it is to acquire them, right?”
Which brings me to the last part of this lesson.
Keeping customers for life. We started out in Automotive Shop B’s example only investing $135.00 for TWO customers, that will average $18,000 over 10 years.
What on earth makes you want to stop there?
Do you want to ensure you get that $18,000 over 10 years to keep two customers? Keep in mind these are the top 20% of your customers, so they are the good ones to begin with.
You have to do better than $135.00 in this day and age. Sorry for the good news.
So, here is the kicker…what if, over the entire 10 years you invested a total of $1350.00 in exchange for $18,000?
Automotive Shop B gets this important piece of the puzzle…
For $19.95 a year, each customer can get FREE OIL CHANGES FOR THE LIFE OF THEIR CAR!
What a deal, huh?
Every 3,000 miles or three months they can get another complimentary oil change! No ordinary oil change either, one complete with vacuuming out the car, washing windows, topping off fluids etc…because Automotive Shop B understands that each opportunity for an oil change is an opportunity for an inspection, which results in additional revenue.
What a deal. So your questions and challenge for the day is…
What is your “oil change?”
What is the lifetime value of your customers?
What house are you going to give away to build your mansion?