Lifetime value of a customer

If you’ve got any interest in marketing, you should be reading Seth Godin’s blog. Today, he talks about the lifetime value of customers.

When planning a new business, it’s easy to get mired in the weeds of complex financial projections – that are nearly almost wrong. But very often, so-called back of the envelop numbers are more useful and accurate. For example, unit contribution, and break-even volume. Understanding the costs of acquiring an average customer and the lifetime value of that customer are also at the top of the list, especially for companies with large numbers of customers. Here’s an excerpt from Seth’s take:

If you walk into a company-owned cell phone store to sign up for a contract, what are you worth? Given the huge gross margins at AT&T and Verizon and the standard two-year contract, I think it’s easy to figure on more than $2000 in lifetime value…

Few businesses understand (really understand) just how much a customer is worth. Add to this the additional profit you get from a delighted customer spreading the word–it can easily double or triple the lifetime value.

So, a chiropractor might see a new patient being worth $2,500, easily. And yet… how much is she spending on courting, catering to and seducing that new customer? My guess is that $50 feels like a lot to the doc. Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it’s important to not only recognize but embrace the true lifetime value of one more customer.

Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers? That’s more money than you have to spend right now, I know that, but what would happen? Imagine how fast you would grow, how quickly the word would spread.

Here’s how you’ll know when you’ve really embraced this–a good customer at your podiatry practice (or supermarket or tax firm) walks out the door in a huff and you turn to your partner and say, “There goes $74,000.”

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