The Importance Of Knowing Your Customer Lifetime Value
Customer Lifetime Value For A Trade Business.
This is an important concept – customer lifetime value. It costs money to acquire a customer, doesn’t it?
Of course, you pay someone to spend time calling people and building relationships. Either way, it’s costing you money if it’s your time, time = money. And if you’re paying somebody, of course, it’s costing you directly.
So, a natural calculation for you to ask is ‘How much did it cost me to acquire this customer and how much are they worth to us?’. And you have to think here in terms of profit from a customer, NOT the revenue, that’s very important.
You want to know that you make more from the customer than it costs you to acquire them, doesn’t it?
If it costs you more in terms of marketing to acquire a new customer than you make from them, you’re going to go broke quickly.
So this is where this idea of customer lifetime value comes in:
Once you’ve acquired a customer, it’s much cheaper to keep them and sell them something again or much easier in terms of resources than it is to find another new one and sell them something.
You’ve built trust, and you like each other already.
If it’s likely that a customer will buy what you sell again, and if you put effort into getting to them to buy it from you, then they’re worth more than the initial job and this is the important thing.
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It’s easy to think of the money you spend on acquiring a customer and compare it to the money you made on that job. And what I’m saying here is over the lifetime that they’re going to be buying from you, they might spend more than that. And it’s a good idea to know how much they’re going to spend over a five-year period and compare that to the cost of acquiring them.
How to get customer lifetime value
Work out what your average customer lifetime value is, and compare that to the average cost of acquiring customers in the first place and keeping them.
You’ve got two numbers:
1. Cost to acquire and keep a customer – and that’s marketing and sales
2.Their value to you over the lifetime that they remain a customer of your business
Remember their value is in the margin, not the revenue.
Say it costs $120 to acquire and the first job you do for them is a $290 maintenance job with a gross margin of $120, you’re down $40.
But, if they’re likely spend money every year for the next five years of an average of $300 every year, then you’re now talking a further $1,500 as a similar sort of margin and that $120 to acquire them doesn’t look so bad now, does it?
So, that’s the concept to get your head around. Don’t worry about my numbers, I know my numbers are sh*t.
You can calculate your average customer lifetime value by going back into your invoicing over the last 2 – 3 years and work out how much you’ve invoiced to each of your customers over the last 5 – 10 years.
I know that sounds a bit boring but you can do it in Xero or in your job management system relatively easily.
Or you could pay someone to do it if you can’t be bothered to do it yourself.
It’s only an average but an average is probably more useful here than looking at specifics.
Now, I’ve been talking recently to Matt Jones of the Site Shed Facebook group and podcast.
And one of his main business is Tradie Web Guys. He’s a digital marketer for tradies, and we’ve been comparing notes of it on the advice we give to our customers because we both give advice about how to do marketing.
We don’t agree on everything (which was interesting).
We decided to run an interview that will be on our website so you can have a look and watch it in your own time.
We’re going to discuss what we agree on and what we don’t agree on and see if we can get to a common position and give you some improved guidance on what you should be doing.
So back to customer lifetime value particularly, what you should be doing to keep your customers coming back to you instead of going somewhere else.
What you should be doing is relationship marketing. It’s an important part of your marketing.
Matt and I agreed on that quite happily but what we differ on is exactly how you should be doing it. I think, if you’re a maintenance trade (small job sizes) then this is infrequent. If you’re doing maintenance work for residential customers they probably don’t call out for plumbers very often.
If you watch my stuff, you’re probably aware that I say that you should be doing a relationship marketing light. You shouldn’t be investing much money and much effort because the return is low, since people don’t repeat work very often. You might be better off investing your money in Google Adwords, your website presence or SEO rather than specific relationship marketing and use fridge magnets and stickers.
Matt has a different view – he thinks it’s useful and less expensive.
Let’s see if he changes my mind.
We’re going to have a webinar about this topic – you can register below at tradiewebguys.com.au/smallfish.
Register for the webinar, they’ll send you updates and tell you when it is or you can go to where it’s hosted and watch it again.
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3. Attend my next Tools Down workshop.
4. Book yourself a 10-minute chat with me. We’ll talk about whether coaching is right for you now and if it is, we’ll go further into the process before you have to make your mind up.
See you later.