Calculating the Value of a Customer
April 1, 2011
By Adams Hudson
What's your company worth? It depends on how many customers are in the asset column.
Oh, sure, when you hear the phrase "assets", you might be thinking cash, equipment, trucks, office furniture, warehouse ... in other words, things you own or nearly own. But don't leave out "customer relationships" in your calculations. They are also assets with an actual economic value - even if they don't show up on the spreadsheet quite the same way as physical possessions.
Maybe you've heard the buzzwords making their way through the marketing world: Lifetime Value, Lifetime Market Value, Customer Lifetime Value, Lifetime Customer Value...
These are all variations of a concept based on what you can expect a customer to spend with your company over time. "Lifetime" is a loose term, by the way - not really a life expectancy calculation of, say, 77 years, but more like a multi-year period of, say, 7 years.
The lifetime value of your customers can be calculated with complicated spreadsheets and software, or you can stick to a simple formula. For instance, let's say an average customer ticket is $150, and he makes two transactions per year, for an average of 7 years. The "lifetime" value is 150 x 2 x 7 = $2,100. (To determine lifetime "profit", you'd multiply that figure by your percentage of gross profit.)
Obviously, large-ticket replacements would send the lifetime value "way up" - and so would referrals from satisfied customers. Regardless, the principle is undeniable: a customer relationship is an asset that can be grown.
Assets can grow through their own activity - regular service, upsells, replacements - and their value is increased exponentially when their referrals set off another set of calculations. But they can also fade to zero, if customers run off with the next contractor that bats his low-priced eyes in their direction.
So look to the lifetime value as a number to be increased and reinforced. What upsells and add-ons can you make to increase the average order? And are you doing what is needed to keep a valuable customer your customer? For the contractor, retention marketing is always the best deal in town.
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Adams Hudson is president of Hudson, Ink, a creative marketing firm for contractors. PHCC members can get a free report "Upsell Your Way to Higher Profits" by emailing their polite request to firstname.lastname@example.org or faxing company information to 1-334-262-1115. See other marketing reports at www.hudsonink.com or call 1-800-489-9099.
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