The Importance of the Lifetime Value of a Customer

In the last blog we spoke about the potential benefits of using SEO for your business. But there is another
important factor when you are deciding whether to use SEO or any other marketing strategy for your
business. That is understanding the lifetime value of your customer. The business world has been so
fixated on the acquisition of new customers that it has forgotten the customer retention aspect of
marketing which is arguably more important. Customer retention will ensure that loyal customers will
continue to do business with you for many years to come and will refer you new customers along the way.

Think about yourself and where you spend your money whether at a restaurant, hair salon, and dentist
these are most likely places that you have been frequenting for many years and have probably referred
your friends and family along the way.

How to Calculate the Lifetime Value of a Customer

How do you calculate the lifetime value of a new customer? The formula that I like to use is
(Average Annual Customer Value * Average Number of Years Loyal)
+ (Average Annual Customer Value * Average Number of Years Loyal) * (Customer Referral Value).
Lets use a dentist as our example, the average person visits a dentist twice a year for a checkup which
consists of a routine exam, x-rays and cleaning. In network dentists will on average bill the insurance
company $250 for this service so you are looking at $500 a year. Based on averages we can say that
customers are loyal for 8 years and each new customer refers 2 new customers on average. We plug this in to our equation and we get (500)*(8) + (500*8)*2 = 12000. So based on our conclusion the lifetime value of acquiring one new customer is $12000. In our example it’s safe to say that this number will be higher when you factor in out of network costs and more advanced dental services which are likely to occur for each customer such as root canal, crowns, and veneers which can range anywhere from $500 to $3000 depending on the extent of the treatment and what prices dentists will submit to the insurance company.

It’s an excellent strategy to use a CRM or an alternative system to keep track of your customers purchase
history and referrals so you can have an accurate idea of the customer lifetime value for your business.

How to retain your customers and ensure that new customers become lifetime customers

1) Quality of Service – It first starts with the quality of your service which leaves your customer feeling like they have won by doing business with you. Were your services provided in a timely matter? Did you take the time to build rapport with the customer and understand their needs/concerns rather than leaving the feeling like they were sold to? Essentially if you can deliver a good product or service, gain the customers trust, and have your products or services priced reasonably will be the key elements which will leave your customers coming back to do business with you.

2) Customer Appreciation – Humans love the feeling of being appreciated by someone else. When it comes to your business you must give your customers the feeling that they are part of your family. There are many ways you can approach this. One of the more popular ways is having a loyalty program where every time they make a purchase they receive points towards a reward. Awarding your customers with a gift on their birthday or a holiday card will make you stand out. Another way is providing your customers with insider news and exclusive member only deals. The general theme here is to continuously give your customers value year-round which will keep the relationship strong.

3) Gain Customer Feedback – Not every relationship will start off on the right foot. Unforeseen circumstances can happen which can leave your customers not having the best initial experience with you. Customers are a lot more likely to post a poor experience online rather than a great experience. Once this poor experience goes viral there’s little that can be done to reverse it making you vulnerable to lose out on future customers. The best way to hedge a situation like this is to have your new customers fill out a short survey in exchange for a discount on a future purchase or a small gift. In the short survey you can quickly discover any issues which arose during the customer’s experience and even uncover blind spots that are holding you back from delivering an exceptional experience to your customers. You can than follow up with these customers personally and give them an incentive to come back and do business with you again.

Summary

1) You should be putting just as much focus on the customer retention aspect of your business as you would with the customer acquisition side of your business.

2) Understand the Customer Lifetime Value of each new customer with the formula

(Average Annual Customer Value * Average Number of Years Loyal) + (Average Annual Customer Value * Average Number of Years Loyal) * (Customer Referral Value)

Use a CRM or have an alternative system in place to keep track of your customers purchases and referrals to have an accurate idea of your Customer Lifetime Value.

3) Make sure your business is delivering on quality of service, customer appreciation, and gaining customer feedback which will ensure the long term retention of your customers.

If you liked this article please like and share with your friends and colleagues!