Increasing Annual Profits by Understanding Lifetime Customer Value

Getting New Customers Is Tough
Acquiring new customers is becoming increasingly difficult and more expensive than ever. With the current economy, many people have started their own businesses to compensate for a job they may have recently lost or to supplement their income. Therefore, there are many new local businesses competing for the same customer base. To make matters worse, the cost of doing business has increased with rising fuel costs, advertising and printing rates and other related overhead factors. It is more important than ever to carefully analyze and track your marketing expenses to improve your overall ROI.
Increasing Annual Profits
If you are looking to increase your annual profits, there are three major ways of accomplishing that. The first way that most people think of is to get more customers. In a minute I will cover why that is the least effective method. There are two other methods which are far more cost-effective Definition Of Investment By Different Authors and will help to increase customer loyalty and retention. The first way is to increase the average dollar value per sale and the second way is to increase the number of transactions (sales) per year. Both of these focus on better utilizing your existing customer base.
Do You Know The Cost Of Acquiring A New Customer?
I would like to put things in perspective and help illustrate the cost of acquiring a new customer versus marketing to existing customers. We are about to get all mathematical here so if you are not a numbers person you will probably want to run and hide. Okay I’m just kidding, but seriously if you are a small business owner, these are important metrics that you need to be aware of, as well as utilize in your daily operations. Unless you enjoy phenomenally large profit margins which very few of us do, your marketing costs need to be analyzed and tracked carefully. You just can’t wing it and expect to be profitable on a long-term basis.
Calculating Customer Acquisition Costs
Let’s say that you spent $500 for a small print ad in a local Talk Business Solutions directory or coupon book. First of all, that marketing campaign needs to be set up in such a way that you know exactly which prospects and customers came as a result of that campaign.
Let’s assume that your $500 print ad produced five customers. Therefore you spent $100 each (customer acquisition cost) to obtain those customers. Most small business owners would assume that if the average net profit per sale was at least $100 then the campaign was profitable. That may or may not be true, however even if the profit was less than $100 per sale, that campaign could still be profitable providing that you properly marketed those new customers for additional sales which could be acquired for much lower marketing costs and hence greater profitability.
Lowering Your Cost Per Sale
Before continuing, I need to reinforce the point that many small business owners may not be aware of or simply don’t think about. A customer that has already purchased from you is far more likely to purchase from you again and the average dollar value per sale is usually higher (make this sentence bold). That alone will increase your profits because your conversion rate and average sale are usually higher. This is true because you already have an established relationship and people have a certain amount of trust that you will provide a good product and/or valuable service.
Calculating Customer Value
To determine the annual value of each of your customers, you need to review your billing statements or statements from your financial software if you utilize any. If your average customer makes a purchase from you 4 times per year and the average sale is $100, you can easily see that customer is worth $400 per year. If you have been in business long enough and have been tracking your customers over the years, you should be able to determine approximately how many years each of those customers stay with you. For example if the average customer stays with you five years and spends an average of $400 per year, the lifetime value of that customer is $2000. As you can see, increasing the number of sales or the average dollar value per sale, even by a small amount can certainly add up over the course of time. That is why it is important to understand this concept and implement along with your regular marketing strategies.
In conclusion, it should be obvious how important it is to utilize your existing customer base for increased profits and brand loyalty. New customers are always important component to an overall marketing strategy, but I feel greater emphasis should be placed on optimizing your valuable existing customer database.

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