How to Measure the Lifetime Value of Customer

Smart small businesses don’t just focus on the initial transaction with a customer. They look at the potential profit that a particular customer can bring to the company over the next few years. For example, a bank doesn’t just earn interest on a customer’s money, but can make additional profit from overdraft fees, check printing, money orders, and home loans. This is why so many companies incent customers to switch their business in an effort to profit from them in the long term.

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It is also critical not to value a customer just based on their individual purchases with the company. Here are 6 other areas every small business should consider:

  1. Revenue minus cost. Too many times, small businesses only look at the top line sales number when evaluating the customer and forget abut the cost of actually servicing them. Why it’s important. Remember that sales is vanity and profit is sanity. If a customer costs more than their revenue to service, that customer is actually costing the company money. It would make more sense to have them do business with a competitor!
  2. Revenue timing. Some companies are very busy in December and can’t fill all of their orders. Why it’s important. A customer that orders during the non-peak month of January could be worth more for that company since business is slow.
  3. The customer’s brand. Is the customer a famous person or an expert in the industry that can add credibility to your company? Why this is important. It is valuable for small businesses to depend on the credibility and reputation of more famous brands. The fact is that if your company does business with Apple, more customers will buy from you.
  4. Referrals and buzz. Does the customer refer other customers or talk about you in social media? Why this is important. Customers now believe other customer reviews more than advertising. This will increase company credibility and sales.
  5. Retention. How long does the customer remain with your company? Why this is important. It is of course more profitable to sell to an existing customer than a new one because there is less of a marketing expense.
  6. Feedback. Does the customer give valuable feedback on your product of service? Why this is important. Most customers will never give the company any positive or negative feedback. This is incredible important in targeting the right customer with the right product.

How does your company measure the lifetime value of a customer?

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Barry Moltz gets small businesses unstuck. He is a small business motivational speaker, writer, and radio host. Barry can be found at www.barrymoltz.com

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