Your Greatest Asset
If you ask a business owner what their greatest asset is you’re liable to get a variety of answers. Some will say their latest machine, or their location, or even themselves. But I say that a business’s greatest asset is it’s customer base.
Some people may think differently because they don’t realize the value of their customers over time. Its the ‘over time’ part that people don’t think about much.
Well, there is a way to think about it, and a way to measure how valuable your customers are to you over time. Its call the ‘Long term Value of Your Customers’. And there is a way to measure it. And a way to help you evaluate your marketing dollars spent.
First we’ll look at the cost of acquiring a new customer.
This won’t be too hard, and it won’t too exact, but it will be close enough.
The first step is to determine how much you spent last year on marketing expenses. Be sure to include all your different advertising and other marketing efforts.
Next, determine how many new customers you sold to last year.
Then divide your total marketing cost by your total new customers, and you get the cost per new customer.
For example:
Total marketing costs from previous year $50,000
Total new customers last year 150
Average cost per new customer $50,000 / 150 = $333
Now, your new customer acquisition cost may not be completely correct, but its close enough for our purposes here.
Next we’ll look at the long term revenues of a customer.
There are several questions that need to be answered in order to determine the long term revenues generated by a single customer.
- What’s the average purchase price of your main product or service?
- What other products or services (accessories) are needed, or usually wanted to go along with your main product or service?
- What is the average purchase price for these accessories?
- How often are they needed?
- What other related products or services do you sell?
- What is the average price for these related products and services?
- Are there add on upgrades available?
- If so, what’s the purchase price, how often to customers upgrade?
For example, suppose we own a hot tub store. We’ll answer these questions and put some dollar figures with them, in order to arrive at an approximation for our long term customer value.
Average hot tub sale $4,000
Total chemical sale $15 x 12 months X 5 years $900
Hot tub cover $250
Average parts sales over life of hot tub $300
Sub total $5,450
Referrals (1 for every 3 cust – sub total/3) $1,798
Total long term revenues $7,248
Average Gross Margin 30% 30%
Long term Gross Margin $2,174
Now, using our hypothetical example, you can see that each new customer costs us $333. And that customers brings us a gross profit of $2,174.
So now comes the big question, how much are you willing to invest in marketing to grow your business if each customer brings in $2,174 in gross profit? That $333 looks like a pretty good investment doesn’t it.
Of course, this is just a hypothetical situation, and your numbers will be different, but this should get you thinking about how valuable each of your customers really are.
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