Leaders Know Their Customer Lifetime Value

business leadershipThere was a great article in the Wall Street Journal this week reinforcing one of the concepts we teach in the SBA’s Emerging Leaders Course – Customer Lifetime Value. It’s always interesting to me that most small to mid-size companies don’t know what a customer is worth to them. As the article points out, service is often dependent upon how much the customer is worth to the business.

The calculation is relatively simple, take a look at your customers and figure out what your average sale to them is. Next, figure out how many times per year that same customer might buy. Then calculate how many years you might have a customer. Let’s say that your average sale is $1,000 and a customer might buy 3 times per year and you usually keep a customer for 5 years – $1,000 x 3 x 5 = $15,000. In this example, the lifetime value of this customer is $15,000. For some businesses in the Emerging Leaders course, the lifetime value was well past $250K. What would you be willing to do for that customer versus the one-time customer for $1,000 that argues with you on price?

Another side benefit of doing this exercise is that you will identify who those good customers are and are not. You may realize you need to cut back on your marketing efforts to those customers who only buy once or have no potential of becoming lifetime customers. Some companies can completely refocus their marketing activities to go after that potential long-term customer more successfully.

As the article points out, resources are spent on those long-term, high-value customers vs. those who are not. They give preferred clients “special treatment” vs. those who do not have potential. Now I know why I’m on hold so long with some companies!! Once you’ve done the calculations, what would you be willing to spend on these customers? How much more service would you be willing to give to them to keep them? Probably quite a bit.

As a leader, it’s important for you to be asking the questions, to continue to evaluate who your customers are and how you should be treating them. Yes, you should treat all customers with dignity, respect, and fairness, but what else are you willing to do to get those customers into the sweet spot of long-term customers that maximize their lifetime value to you?

Good companies have programs to reward and encourage maximum customer lifetime value. Make sure you know what yours is.