The Lifetime Value of a Customer

The goal of all business is to find and keep customers.

Once we understand this principle, the next question is: what am I willing to pay to acquire a new client, customer or patient? This is a fascinating subject wrought with charts, graphs and opinions.

Let me help you with your decision-making process. First, we need to determine the lifetime value of a customer. If I acquire one new client, customer, or patient, what is the monetary value to my business? This will differ greatly from business to business. Are you a: restaurant, veterinarian, CPA, chiropractor, dermatologist, realtor, massage therapist, tire shop, salon, landscaper, dentist or an architect? All will have different dollar values attached.

How about a car dealership? An excellent car dealership could sell a client a brand new $30k car every 5 years for decades, plus tires, service, etc. The lifetime value of this customer could easily be $150,000-200,000!

A restaurant may average one visit per month with an $85 tab, times 12 months equals around $1000 a year. The average person in America lives in the same place for approximately 5-7 years, thus one client could be worth $5,000 in sales over the next 5 years.

I have been with the same CPA for 25 years and I pay him $x,xxx dollars per year…

A chiropractor who sees you once a month at $45 per visit grosses approximately $500 a year, which equals around $3,500 over a 7 year period.

Go ahead and figure the lifetime value of a customer for your business.

Once we know this figure, ask yourself:
How much money do I spend every year on advertising, marketing and promotion?

Every business should be tracking where every new lead comes from. If you’re a dentist, you may be advertising in the yellow pages (in my book, not a good idea unless you’re dealing with a boomer/senior demographic), in the newspaper, on billboards, with Google/Facebook, direct mail, or through referrals.

Have your receptionist track where every new patient comes from. These should be tabulated on a monthly and yearly basis on a spreadsheet. Correlate your monthly marketing/advertising expense with the actual number of clients who have hired you. Graphing this, you will see immediately the correlation of dollars spent and patients acquired. How well do they match up? More importantly, how much across all marketing/advertising channels does it cost to acquire a new client? Are you happy with this number?

When I was in retail, I spent 5% of my gross on advertising and marketing. In January, a rep from the newspaper came to sell me a $500 Valentine’s Day advertisement. I looked the saleswoman in the eye and asked her, “Can you guarantee me $10,000 worth of sales if I buy your $500 ad?” After her eyeballs went back into her sockets she said, “No, absolutely not.” And I replied, “Then why should I buy an ad from you?”

In the pre-inte
et days, the big question was: Do I spend 5% of my gross on advertising/marketing, or do I spend 5% of what I want to gross?

I started my advertising career in New York City in the 1970s. One of the first axioms I heard was: “Half the money you spend on advertising is wasted but you never know which half…” Enter the internet. We now have tremendous metrics available to us to tell exactly where our traffic is coming from and what our conversion ratio is.

Let’s talk about some definitions. If I’m standing in your brick and mortar store looking out at the traffic on the busy street in front of you, the number of people who see your sign can be construed to be impressions. The number of people who come into the store could be construed in internet lingo to be leads. Please remember these are shoppers, not buyers. The number of people who actually buy could be called closed sales or conversions. The ratios of impressions, leads and closed sales can now easily be measured with your online advertising campaign. Impressions are the number of people who see your online ad. Leads are the number of those people who click on your ad. Conversions are the number of people who actually buy.

Let’s tie this all together. Once you know the lifetime value of a client and you decide how much you are willing to spend to get that client, you now have the basis for a budget for your online advertising campaign.
But wait, there’s more…
Now comes the hard work. The hard work is finding who your potential customer base is, creating an online advertising campaign that creates resonance with that demographic, and then test and test and then test some more, until you know those three numbers: impressions, leads and conversions/closes.

It is at this point that you will know exactly how much it costs to get a new client. When you correlate the cost of finding a new client with the lifetime value of the client, you are now in the position to turn your website into a cash machine™. This is when we business acceleration experts™ step on the gas. At this point we know exactly how much money we need to spend in order to gross x amount of money.

Question: If you knew that for every $5 you spent you got back $50 guaranteed, how many times a day would you like to complete this transaction?

An insurance agent told me they were willing to spend $26 to acquire a new client. Why this number? For every $26 they spent on Google advertising, they got a new client who provided them immediately with a $160 commission (the first year!). Once they sold them a car insurance policy, they started dripping on them to sell them home insurance, life insurance. That commission could triple in a year and go on for the rest of their life! Would you be willing to spend $26 to earn tens of thousands of dollars?

Would you be willing to spend $50 to bring you $1,200 a year? A client recently said YES, but not before going through this important process. Once we have the information as to the lifetime value of a customer, have tested and found the true accusation cost, the conversation is framed completely differently and the mind shifts.

Now you understand why your competitors are willing to spend hundreds if not thousands of dollars every month to acquire new clients. The caveat is that you must identify a target demographic that resonates with your product or service and the proper marketing channel.