This Episode: Lifetime Value Of A Customer

 

In this episode of Real Retail TV, I’m going to show you how to calculate the lifetime value of your customers. 

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Let me tell you a story. Back in the late ’80s, early ’90s, somewhere back in the mists of time, after my business, the Mackinaw Kite Company, had successfully transitioned from being a pure-play kite shop to being a hybrid kite toy business. We would always go to an event– an event for the parents of young children. There was an organization here in town called the Year of the Young Child. And every year for a day, a Saturday in the fall, they would rent a school gymnasium, and all the local organizations and businesses that catered to the parents of young children would all come and set up and talk about their services, shop their wares, and do all these sorts of things.

And I always liked the opportunity. We’d set up– I’d put some of our Brio and Thomas the Tank and Playmobil on the floor. Or the kids would get a chance to play with our toys. I’d get a chance to chat up the parents. But really, it was kind of a pain in the neck. You know, we had to schlep everything there. You know what I’m talking about. If you’re into retail, you know schlepping. So we’d schlep everything there– set it up. The kids would all play– break it down– schlep it back.

And we never really did that much in sales. There would be some sales during the day, and there’d be a little bump the following week. But if you looked at it– just the revenue from that event– it wasn’t worth it. So after doing this for several years, my brother, Steve, and I decided we weren’t going to do it anymore. It wasn’t worth it. And then a couple of months after that decision but before the next year’s event we learned– I learned about lifetime value of a customer, and it changed my business life.

And I think it’s going to change yours also. You see once I determine the lifetime value of our customers, which was around $4,000, my feeling about this event changed dramatically. And it went from, Oh yeah– nice kids– how you doing– being friendly– being nice– to, Oh my goodness. There is a building filled with people with $4,000 stamped on their forehead. And of course, I wasn’t that mercenary about it. But it was the truth. There was a building filled with prospects, and each of those prospects represented $4,000.

And when you start thinking about $4,000– when you determine the lifetime value of your customers, It’s going to help you determine how much you’re willing to pay or give up to get a new customer. It also keeps you focused on keeping your customers happy and loyal. And it keeps you focusing on marketing, particularly, to your current customers. Once you know the lifetime value of your customer, you’ll start to understand how much you’re willing to pay or how much you’re willing to give up to get a new customer.

Once you understand the lifetime value of a customer, it keeps you focused on keeping your customers happy and loyal. Once you focus on lifetime value of a customer, and that will keep you focused on marketing, particularly focused on marketing to your current customers. Staying focused on the lifetime value of a customer allows you to cut your difficult customers some slack. You realize that you’re not willing to lose a customer, and all of that beautiful lifetime value changed my life. I hope it changes yours.

So let’s figure out the lifetime value of your customer. So lifetime value– I hope that you have a piece of paper and a pen. If you don’t, pause this video– go get it. You might even want to go get your key employees or your partners. You might want to do this together, because like I said, this is a rock and concept. So it’s determined by doing this simple equation. You take your average sale and then you multiply it by the average times your average customer shops every year. And then you multiply that times the average number of years a customer stays with you, OK?

So we’ll go through this and you can see how this all works. So let’s play with this. So these are generic numbers that I’ve created just so we can play with lifetime value of a customer for a fictional business. But what I really hope that you don’t do is start thinking about the numbers, like saying, Oh, my average sales a lot different than that. My customers are different than that. But don’t focus on the number but focus on what the concept means to your business.

So again this is a fictional business with generic numbers. So in this fictional business, Bob’s Boutique– let’s call it– the average sale is $50. And at Bob’s boutique, the average customer comes in six times a year. Now, I know some of you are going well wait a minute. Some of my customers come in three times a day, and some of my customers come in once and never come back– I get that. We’re just looking for an average. No matter what there is always an average.

So just spit ball this number. Don’t get too caught up in the minutia. And then the number of years that the average shopper stays with Bob’s Boutique is 10 years. So in this case, the lifetime value of a customer at Bob’s Boutique is $3,000. Do you see why? $50 times 6 is 300 times 10 is 3,000. That’s Bob’s Boutique right now. But let’s play with this a little bit. This is where the fun starts to happen.

So Bob, in his wisdom, engages in some sales training and does a little bundling and raises his price a little bit. So Bob raises his average sale 5% from $50 to $52.50 And Bob starts to be a little savvier marketer. And Bob does some things– he starts doing some more promotions and special events. And Bob increases the average number of visits per year from six to seven. You see none of this is too difficult. Those are all just by applying what you can learn from WhizBang Retail Training in your business. This Is all eminently doable. And then Bob increases the number of years from 10 to 11.

So now if you do that math– $52.50 times 7 times 11, Bob has now increased the lifetime value of his customer from $3,000 to $4,042.50. That is a 25.7% increase. That’s a huge increase without doing very much. But you see if Bob does this with all of the customers in his customer database, this starts to really, really make a difference in the long-term outcomes. It makes a big difference in his overall prosperity. But now let’s take it one step farther. Let’s talk about something that is still incredibly doable– incredibly doable.

I’m looking all of you in the face and say that unless you are on rails– unless you are totally awesome and nailing it to every part of your business, you can probably do this. Bob took his average sale from 50 and increased it 10% to $55. If you aren’t using the retail sales academy right now, I’m looking you in the face and saying, By creating a service culture that sells by using the retail sales academy to create a service culture that sells, you can easily increase your average ticket by 10%.

Bob got serious about marketing. Bob started doing a lot more promotion. Bob started doing a lot more with social media Bob started doing a lot more marketing. So instead of it being six times a year, Bob has increased the average number of visits per customer from 6 to 10. And because Bob is doing all of these things so well, he is engendering loyalty. You see the beautiful thing about marketing correctly– this customer-focused marketing that we teach here at WhizBang Retail Training– is that when you’re doing it correctly, your customers come to know you– like you– trust you– be more loyal to you– stay with you longer.

So instead of the average number of years being 10, Bob is keeping the average number of years to 15. Again, none of these numbers are mind- blowing. All of these numbers represent something that is very doable. But you see what’s happened here? The lifetime value went from $3,000 to $8,250. That is an increase in the lifetime value of Bob’s customer of 175%. Let that sink in, ladies and gentlemen. That is doing nothing to get new customers. That is merely doing more with the customers that Bob already has.

Your action plan for today should you choose to accept it is to play with these numbers. I mean really play with these numbers– not just you. You know the key employees– if you have a partner– play with these numbers. See the power of lifetime value of a customer. Recognize what it can do for the long term profitability of your company and start to mold your company around this concept so that you keep your customers first– so that you’re always looking to A– keep your customers, and B– work to increase their lifetime value.

There it is– lifetime value of a customer. That concept changed my business life forever. And if you’ve never been exposed to that concept before, I hope it changes yours. If you’ve already known about it, I hope it reinvigorates you. It helps you focus on doing the things that are going to give your customers that great experience– that are going to make them loyal that will increase that lifetime value. If you don’t subscribe to our free email tip of the week yet, I would strongly encourage you to go to whizbangtraining.com– sign up. Every Wednesday we’ll send you something great.

And if you want more information on how to build that sales culture that I talked about or how to be a really, really WhizBang marketer, go to WhizBang training. Or while you’re there signing up for the tip of the week and look at the retail sales academy and look at the retail mastery system. They are two resources that will do amazing, amazing things for you.

And until then, we’ll see you next time.

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