Posted by Tony Bentall
Posted on 20th August 2015
It’s strange, but many small-business people have no idea what a good regular customer is worth to their business. By calculating that figure, you should gain a better idea of what you’re willing to invest or risk to attract a good, regular customer. The calculation will also tell you how important it is to keep your existing customers happy. The cost of retaining a customer and even expanding a customer’s value is much less then getting a new customer.
Every business owner knows that some customers are more valuable than others. But understanding the average value of a customer is a powerful metric you can use to boost revenue, reduce interactions with bad customers, and attract higher quality customers.
Knowing your customer lifetime value can help you plan everything from how much you should spend marketing to new customers to how to boost overall customer worth. How do you attract high-value customers? What can you do to focus on relationships with your best customers? Can expanded offerings increase revenue for existing customers?
To determine what you’re willing to invest into marketing for new customers, first discover what an average new customer is worth to you. To determine their value, answer the following questions:
1. What is your average sale (transaction amount)?
You wouldn’t believe it but there are many business’s out there that cannot answer this question with confidence. It is essential to your business strategy that you can answer this.
2. What is the frequency of your average customer?
Your avergae can be expressed in transactions or visits per week, month or year, depending on the type of operation you run.
3. What % of new customers become average regular customers?
We call this the “conversion ratio.” which will undoubtedly vary depending on how that new customer was generated. For example, someone buying for the first time using an aggressively priced coupon would less likely be a repeat customer than one who bought based on a personal recommendation of a friend. To be more accurate, you may want to calculate this information based on several different criteria and then take an average.
4. What is the average life cycle of a new customer?
Once you get a customer, how long will that customer continue to buy from you before he or she moves, gets mad, or no longer has a need for your product or service? This length of time can generally be expressed in months or years. It may be a more difficult number to get, but do your best.
5. How many new customers are referred to you by your existing customers?
When you gather information about a new customer, ask how they found out about you. One possible answer is “referred by a friend.”
How to Determine the Value of a New Regular Customer
In order to figure out how much in gross sales a new regular customer brings you in a year, you need to define what a regular customer is. Through a careful audit you can determine this information. Obviously, “regulars” can range from several times a week or several times a year. So, set those criteria. For example, a typical fast, casual food operation may set that number at three or four times a month, while a more upscale operation may set it at three or four times a year.
Then you simply multiply that average regular frequency number by your average check. We use the average check, not the average guest, because for local store marketing (LSM) it will be a more accurate number, in that you have one person who influences the dining decision. For the purposes of illustration, let’s say that we have determined that your average regular frequency is once a week with an average check of $10. By simply multiplying 52 weeks by $10, we then have calculated that the value of a new regular customer is $520 annually. As simple as it sounds, many operators don’t bother to figure this out, which means they’re flying blind.