What is the most valuable asset in your business?
Some business owners would say it is their great location… inventory…great customer service…or unique products. But in reality, it’s your customers that are truly your most valuable asset.
When you intimately understand the value of your customers and begin implementing the powerful strategies I’m about to reveal, you can start capitalizing on the hidden profit opportunities within your business.
I invite you to learn from the principles, concepts and marketing strategies I have successfully used for 10 years as a marketing professional and use them to build your own business, increase your sales, or enhance your bottom line profits.
The cost of attracting new business is much higher than reselling to existing customers. Unfortunately, most business owners spend all their marketing efforts focused on creating new business, or new customers, yet fail to exploit the full profit potential of the investment they have already made.
If your best bet for producing immediate, low costs sales is from your current customer base (and it is) then what specifically can you do to encourage repeat business? Let me share some sales-building marketing concepts with you to illustrate.
First, determine the lifetime value of a customer. Once you do this, you will know how much you can spend to attract a new customer. You’ll also have solid numbers to evaluate the profitability of your current marketing and advertising efforts…eliminate what’s not working… and repeat what works best.
Here’s how to determine the lifetime value of a customer:
1. Calculate your average sale by dividing your total sales by your total transactions over the past 12 months. If your sales were $90,000 and you processed 1800 transactions, then your average sale is $50.
2. Figure out your profit margin. Let’s say your profit margin, after all expenses, is 20%. This means your business earns $2 for every $10 in sales.
3. Determine how often, or the frequency, your customers buy from you each year. To do this, divide your total transactions by your total customers. If you had 300 customers over the last year, then (on average) your customers buy from you 6 times a year. Of course, once established, your customers may buy from you for many years. So…
4. Determine your customer retention rate. Let’s, for now, assume the average length of time a customer does business with you is 3 years.
Now, for this example, we have each customer spending $50 with you an average of 6 times a year for 3 years. Therefore, each satisfied customer will generate $900 in sales. At a 20% profit, you will earn $180 from each new customer.
** This is the lifetime value of a customer **
Armed with this knowledge (and not one in 1,000 business owners understand this) you could literally spend up to $180 to attract one new customer and still break-even. How hard would it be to create a $50 sale if you knew you could spend $180, or $90, or even $45 to attract that business?
Why can Columbia House sell 11 discs or tapes for one cent? Because they understand the lifetime value of a customer.
So if your run an ad, mail a letter, hire salespeople or put together a promotional campaign, you know that for every $180 you spend, you must attract one customer, otherwise you’re losing money.
When you don’t know the lifetime value of a customer, you’re making important advertising and marketing decisions blind. Also, when you fail to convert a prospect or lose a customer due to ambiguous marketing, rude employees, poor quality, or lack of follow-up, then you are throwing away $180 in each case.
On the other hand, you can literally make a fortune compounding your sales and profits by taking this concept a few steps further. Here’s how:
Small gains of only 10% in your customer base, average sale, frequency of purchase and customer retention rate can
Dramatically increase your sales and profits in 12 months or less.
Here’s how it works:
1. Increase your customer base by 10%.
There are many ways to do this including improving the effectiveness of your advertising, developing promotional events, co-promoting with other businesses, using coupons, etc.
2. Increase your average sale by 10%.
This can be done many ways. Examples include offering additional products or services after the customer has made a purchase decision… adding additional products or services to your existing line (thereby giving the customer the opportunity to buy more)…and creating packages of products or services and rewarding the customer with a discount, flexible terms, free gift or some other incentive.
3. Increase the frequency your customers who do business with you each year by 10%.
This can be done through special promotions and by offering new products or services. Make it fun and easy to do business with you. Ask your customers to buy from you often. Communicate how much you appreciate their business.
And one final step…
4. Increase your customer retention by 10%.
Concentrate on offering the best quality and customer service you possibly can. Reward people for their continued business and referrals. Send gifts and thank you notes. Develop a customer mailing list and contact your customers on a regular basis.
By applying these proven strategies and achieving a modest 10% increase in each area, YOUR PROFIT MARGIN COULD LITERALLY DOUBLE. But to be conservative, let’s assume your profit margin goes from 20% to 23%, or a small 15% increase.
So what does all this mean? Let’s look at the results and the synergistic effect it has on your sales and profits.
You now have 330 total customers, an average sale of $55, average repurchase rate of 6.6 times a year, and a new profit margin of 23%. Your sales would then increase from $90,000 to almost $120,000. THAT’S A 33% INCREASE! Do this for 3 years and you double your sales.
Now, with a 23% profit margin, the lifetime value of your customer increases from $180 to $276…more than a 50% increase in profits! Instead of making $18,000 a year (with just these small gains) you are now making $27,600.
What if, instead of 10%, you were able to increase each area by 20%? Here’s what happens:
360 x $60 x 7.2 x 3.6 = $537,000 in sales
$537,000/360 = $1,490 per customer
$1,490 x 23% = $343 profit per customer
So within 12 months, with 20% improvements in each area, the lifetime value of your customer becomes $343…A hefty 66% Increase and a fabulous 190%increase in profits!
Begin now. Apply your own sales numbers to the above formulas. Calculate the lifetime value of your customer. Use this information to reveal the true value of each customer. Be certain that your ads and promotional activities are attracting enough customers to justify their continued use.