LIFETIME VALUE OF A CUSTOMER

Every small business owner needs an answer to the following two questions:
1.   What is the cost to get one new customer?
2.   What is the approximate income per customer during the lifetime relationship with that customer?

While the internet provides a source of almost zero cost in obtaining a new customer, I don’t believe that customer acquisition is really a zero expense. Networking, web sites, marketing material and, most importantly, your time are all factors that have to be considered in your customer acquisition cost.

Let me start with the “time” factor which many small business owners don’t figure in when estimating cost. As an example, if you are a one-person business and your goal is to generate $100,000 gross income this year and if you work a 40 hour week for 50 weeks, your hourly rate is $50/hour.

If you attend networking sessions or have printed marketing material to hand out, you just added meal costs, printing costs, transportation costs, etc. to your new customer acquisition costs. If you spend two hours at a networking session plus pay admittance of $25 and if you get one new customer, your acquisition cost was $125. At this point we did not consider incidental expenses that are needed to support your business. If the lifetime income value of your customer is less than $125, you are losing money with each new customer.

These two questions must be answered by every business owner. Budgeting is an important part of growing a business, and knowing the acquisition cost and lifetime value of a customer is necessary for proper planning.

The second part of this issue is your retention costs. In a normal business operation, an effective retention program is usually less expensive than a new customer acquisition expense. Do you have a systematized retention program for existing customers?

Please let BizQuack know if you would like an educational session on customer retention.

“One customer well taken care of could be more valuable than $10,000 worth of advertising.”  Jim Rohn