What are your clients really worth?…their Lifetime Value
If you don’t know your Key Performance Indicators are, like the ‘lifetime value of your customers’, your ‘average margins’ and the ‘cost of acquiring a new customer’ you are flying blind.
How do you know what’s working and what’s not?
You can’t improve what you don’t measure.
Why is it so important to know the average profits you make from a new customer, the average profits you’ll make from a customer in their “lifetime” of dealing with you, and a few other key “metrics” of your business?
The reason is simple. Those key pieces of information can guide you in creating effective marketing and advertising strategies that make you real profits and help you DOMINATE your market.
Let me give you two examples…
Let’s say that your average client brings an average profit of $75 on every sale. And they purchase from you an average of four times a year and they stay your customer an average of 5 years.
The Lifetime Value or your customer is $75 x 4 times a year x 5 years = $1,500
Theoretically you could spend $1500 to bring in a new customer and still break even.
But this doesn’t even account for the number of referrals that client will send with the same Lifetime Value.
The point is if you’re spending less than $1,500 you know you’re making a profit.
If you KNOW you can afford to spend up to $1,500 in acquiring a new customers or retaining current ones, then you can create advertising, special offers and deals with that key number in mind…
Here is why big ticket retailers, like auto dealers really benefit.
According to NADA, the average new vehicle gross profit margin is $1088 and the average used vehicle gross profit margin is $1534.
Plus the average customer visits your service/parts department an average 2.5 times per year to the tune of approximately $700 in revenue or $350 of gross profit.
As an auto dealer let’s say that you make a gross profit of $1500 on the sale of a used car/truck. This customer then typically visits your service/parts department an average of 2.5 times per year at an average of $350 additional gross profit each year.
The first year value of this used car customer is $1500 plus $350 per year in service/parts gross or a first year value of $1850.
Consider then, a conservative 5 year lifespan with you and you have a conservative lifetime value of $3250.
If you are also a new car dealer, the first year value is approximately $1450.
The 5 year lifetime value of a new car customer is then approximately $2800.
Here is a different perspective:
Jeffrey Gitomer in his book “Customer Satisfaction is Worthless, Customer Loyalty is Priceless” says: The Value of a Customer is 20 Times his Annual Sale Volume
I’m going to take a more conservative approach and state that the value of a customer is 20 times his annual gross profit:
$1450 x 20 = $29,000 Lifetime Value (LTV) for a new car customer and
$1850 x 20 = $37,000 Lifetime Value (LTV) for a used car customer.
Your competitors who don’t know this Key Performance Indicators (KPI’s) will either lose their nerve or lose serious money trying to compete with you.
None of these calculations include the number of people she/he refers to you over their lifetime that you didn’t have to spend any money on attracting and convincing. These No-cost referrals have the same lifetime time values.
When you begin to understand the magnitude of this way of thinking, you can easily grasp just how plausible it is to double your business in 12 short months.
I’ve just given you a tiny snapshot of the value of Key Performance Indicators. Knowing these metrics can make the difference between getting rich and going broke and, with your Key Performance Indicators in hand, you might discover that a certain kind of customer is far more valuable and profitable to you.
Go Back to the 80/20 Principle we discussed yesterday.
So you can gear your marketing efforts toward capturing those high value, high profit clients.
With the right information you can massively increase the profits in your business and multiply the power of all your business and marketing efforts.
Calculating the Key Performance Indicators of your business is not that difficult. For the motivated business owner who wants to DOMINATE his or her market, it is critical to know what they are to track consistently.
Imagine being able to make decisions in your business on advertising, marketing, promotion, merchandising, displays etc…with the hard-core data you need right at your fingertips.
The bad news is if you don’t have that data it IS costing you real money every day.
The good news is you can have access to the information you need simply and easily.
Principle Centered Marketing encompasses your whole business from the Inside-Out.
