Lifetime value of a customer

November 19, 2009

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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The case for product evolution

October 12, 2009

One of my clients is looking into launching a specialized job site, in a space that seems to have been overlooked. One thing he’s wrestling with is whether to A) Start small, dominate one niche, and expand, or to B) Go after something a bit bigger right from the start.

I see a lot of entrepreneurs flame out with option B. They spend months raising capital, building fancy tech, and launching major marketing campaigns, only to find out that the dogs don’t want to eat the dog food they’re serving.

Instead, I usually vote for option A. Seth Godin does a great job of explaining why here:

“Envision the events that might happen to a brand (shelf space at Walmart, an appearance on Oprah, a bestseller, worldwide recognition, a new edition, worldwide rights, chosen by the Queen, whatever) as a series of dominos.

It turns out that if you start with all of them at once, you’ll fail. And if you start with the big one, you’ll fail.

But if you line up all the dominos one by one, in the right order, you may just have enough energy to push over the first one. That one, of course, adds momentum so that when you crash into the second one, that one goes too. All the way to the Queen.

Wait! Isn’t this obvious? Sure it is. So why is it so often ignored?

Brands get stuck constantly. And they always get stuck circling the big domino. They try to launch worldwide and beat Google. They try to get an endorsement from the Prince of Denmark. They try to break out with a feature on a major blog. They try to act like Coca Cola from the first day. And they try and they try and they try until they get so frustrated, they quit.

A few brands pick out tiny dominos instead. And topple them. And they do it again. They do it so often they create noise, momentum and most important, a sense of inevitability. That’s how you win.”