Two Magic Numbers Every Business-Owner Needs to Know: Part 2
Following on from last week’s post, let’s take a look at the second number that we think can transform your business decision-making. Read on to find out how to access free resources and discounted training sessions to help you get even more from your own magic numbers!
Magic Number 2: Your Lifetime Value of a Customer or ‘A budget for dating…’
The next magic number is the answer to another key question: How much can you afford to spend on acquiring a new customer? It’s surprising how many businesses don’t know the answer to this question and how many waste effort and money on ineffective marketing tactics, instead of targeting the right customers. Imagine you were going speed dating, would you get the cheapest outfit possible so you could afford to go to hundreds of speed dating events or would you invest in the best suit and do the research to make sure that the event you go to is likely to have similar people? Admittedly sometimes you have to go to a few wrong events before you find the right one and it’s like that in business, but ultimately without knowing what you can afford to spend when acquiring a customer it’s a very hit and miss activity.
A good CRM system can be very valuable in helping you answer this question because it allows you to track, how customers found you, how often a customer visits you and how much they spend when they do. Alternatively, you could run a customer survey or look at industry statistics as a starting point if you’re a new business.
How it works for Fred’s business
Again, let’s see how this magic number benefits Fred’s business:
- Imagine Fred spends £3,000 on a direct mail campaign to 2,000 prospects and generates 20 new customers. That’s a cost per acquisition of £150
- Each customer spends on average £600 each at a 25% margin – i.e. £3,000 of value from £3,000 of spend
- Would Fred repeat the exercise? With just this information, he would probably decide not to
- However, if he considers the lifetime value, he gets a different result. If Fred knows that a new customer will on average spend around £600 once they have bought from him, but that 50% will come back and buy again – and on average they will spend another £2,000 over the course of the next 5 years, then things look very different
- Therefore, each new customer is worth £1,600 in sales which at Fred’s gross margin percentage of 25% is £400 in profit. With a cost per acquisition of £150, this marketing can now be seen to have an ROI of 266% and is definitely worth repeating. He can then use this ROI to compare different marketing activities for effectiveness.
- Knowing the lifetime value helps Fred to decide how much he can spend on acquiring that customer in the first place. This is valuable insight when it comes to making marketing decisions – and essential for really making excellent business decisions.
Want to work out your own customer lifetime value calculation? We’ve created a simple spreadsheet tool to simplify these calculations. Enter your details below to request your free copy now!
Special offer: Discover your own magic numbers – at a discount!
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