As I work with clients to help them increase revenue a common question is “What’s a customer worth”? If your answer is something like “the amount of a sale” you may need to look deeper.
To begin it’s important to understand the long term value of a customer in order to make good decisions associated with growing profits and your business. How do you know how much to invest in advertising, marketing, and sales if you don’t know what a customer is worth? Does it make sense to spend $1,000 in advertising to win a new customer if they’re only worth $500? Not a good investment.
It’s important to know how much the average customer spends with you in a given period or time (year) and to know how long they remain a customer. Knowing revenue per customer per year is good, knowing profit per customer per year is even better. Sometimes there may be more than one calculation involved. If you have multiple product lines or services you may want to do this calculation for each.
The important point here is know what the numbers are for your business. As 2011 comes to a close, year end financial reports offer a wealth of information on the value of a customer. If you know what a customer is worth business decisions become much easier to make and more obvious. If it takes a $200 credit to keep a customer worth $1,000 a year, that can be a good investment. And, there are intangible values that can be harder to measure. Does the customer refer your business to others? Do they offer advice or suggestions? Do they pay a premium fee for a premium, more profitable, service? Are they important in their industry and is that industry important to you?
Know the value of your customers and the answers to the questions above if you want to make even better business decisions in 2012! It’s well worth the time and effort.
Good post. I would also add that their are other intangibles that come into play such as how much your customer does or does not appreciate the work that you do for them, pays on time or pays late, and how easy it is to communicate with or not. But your message is right now, knowing your customer is a very important thing.