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What is a customer Worth

What's a customer really worth?

Now here's a really interesting question; "what is a customer worth to me?" The vast majority of business owners believe a customer is only worth what ever they spend at the time. Here's an example. Say a hairdresser advertises and gets 1 new customer in the door and that person spends only $25 for a hair cut. Now, if I was to ask the question to the hairdresser of what that customer was worth they would most likely reply "only $25"

Let's talk about ‘life time value'. This is the ‘true' worth of a customer. Life time value is worked out by multiplying the average dollar spend by number of times they come back in a year, then multiplied by number of years they continuing coming back.
Using this formula working out our hairdresser scenario above;

Average dollar spend: $25
Number of times a customer comes in: 1 time per month (12 times a year)
Number of years: 3

$25 x 12 x 3 = $900

So the lifetime value of this new customer is $900, not $25 (believe this or not the actually lifetime value of a female client for a hairdresser is $5,000)

Obviously, this all depends on the quality of your service / products and your skills at implementing ‘customer retention' strategies.

The benefit of knowing your customer's lifetime value is enormous as it can help you with your marketing and advertising strategies. In the above example if a client is worth $900 what could you do to attract more?
Do you think you could afford to make a good offer or giveaways to entice new customers? Absolutely! You could offer a free haircut to new customers or a free hair accessory pack etc.
Knowing your lifetime value helps you with your advertising spend too. If you spent $200 on an ad and only received 1 new customer you are still ahead (if you spent $200 advertising hairdresser services and only got 1 new customer you are doing something definitely wrong, but anyway...)

Lifetime value applies to all businesses - sure there are some that are better than others. So take the time to work out what a customer is really worth to you...

Article by Brian Brown

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