Use The Lifetime Value Of A Customer To Increase Cash Flow And Profit

by Doug Smith, President, The Woodhaven Group  

To grow your business you need to retain your most profitable customers.  By keeping a customer who is profitable for the company it adds stability to the organization while increasing all important cash flow.

Lose customers and your business will find itself spending expensive upfront marketing dollars always acquiring new customers to replace ones that went to the competition.  Marketshare does not increase, profit becomes stagnant at best and cash flow suffers.  Consider it lost opportunity.

Some owners and CEOs say that they are satisfied to always be prospecting for the next new customer.  Losing customers, in their opinion, is just a cost of doing business.

These owners would not think this way if they took the time to calculate the lifetime value of a customer.  What is a customer worth?  Knowing this number gives the owner information that helps in developing and executing sales, marketing and operational strategies.  This knowledge becomes a competitive weapon allowing your company to utilize unique promotions or incentives since it becomes easier to identify your true return on investment per customer.

The lifetime value of a customer is really the profit generated from the sales of a customer over the liftime of buying from your company.  It is best to calculate using  group averages broken down by product category.  This allows you to then decide where to spend the most dollars to retain a specific group of existing customers.  Also, based upon the lifetime value of certain groups it shows marketing and sales where to invest the most dollars to acquire new customers.

The best example of explaining  the lifetime value of a customer calculation was in a Harvard study years ago. Read the Harvard customer study here.

As a CEO of a department store I not only knew the lifetime value of the lady shopping but also the lifetime value of her husband and 3 children as a family group.  I knew that if I satisfied the 3 children growing up shopping in the store I would have their 3 families as lifetime customers when each of them got married and had kids.  You can imagine how I calculated the lifetime value of a multigenerational family.  In some cases I had 3 generations of the same family as loyal customers.  It made an easy decision to happily accept that returned gift after Christmas.

The takeaway:  Know the lifetime value of your customer and never take that customer for granted. Now when you lose an upset customer because of poor customer service you know exactly how many dollars just walked out the door.

Advertisements

Tags: , , , , , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: