Lifetime Value of a Customer

In my research into direct marketing, I keep on hearing the phrase “lifetime value of a customer.”  You see, anyone who methodically targets an audience with an “amazing offer” is usually looking for a client, not a sale.  If they get you to buy a Sham-Wow, a set of Ginsu Knives, a Bradford Exchange figurine, or your first 10 CD’s for a penny, they will have opened the door to future sales.  The future sales are what they make their money on.  By making the initial purchase the buyer is saying, “I’m the type of person who is willing to purchase this kind of item from you via this form of marketing.”

In the recent article on “Spruikers”, I wrote, “If you convert (new customers) into long-term clients, their lifetime value from personal spending and referrals is virtually immeasurable.”  Today I want to help you estimate that “immeasurable” number.  Since you lose some clients every year to attrition, let’s call 20 years a lifetime.  Take your average annual sales over the past 5 years and multiply that by 20.  Take a look at how many clients are on your current database (assuming you have one.)  If you’re doing around $800,000 per year as of late, and you have accumulated 3000 names in your POS system, your L.V.C. is in excess of $5,000. 

Does anyone else think that it’s worth spending some money to add more names to that list?  What if you were to spend $20,000 this year to attract new customers to your store?  If you make sales to 150 new customers through your efforts and each of them spend $140 that’s only $21,000 in sales.  That barely covers the cost of marketing, and not the product itself.  Failure?  Not necessarily.

Let’s look at the lifetime value of 150 new customers.  If your L.V.C. is $5,000, then 150 new clients are worth $750,000.  Yes, that’s three-quarters of a million dollars.  How much would you spend to get those 150 new clients now?

As you consider your marketing plan and promotional calendar, don’t forget to take into account the need for targeting new clients.  If you market exclusively to your known clients, that attrition I mentioned earlier can take that same $750,000 away from your future sales.