Customer life cycle: How much is a new customer worth to your business?
Ever wondered how much you can afford to spend on your marketing and still make money? Lucy Ross – Director at EcommerceMarketing.co.nz with an online marketing update video about your customer life cycle, what it is, how to calculate it and how to know if your marketing is working.
How much is a new customer worth to your business?
We all know the old saying goes you have to spend money to make money. But when I speak to people about their marketing budget it is amazing to see how many people do not know how much they can afford to spend to acquire a new customer.
As a business owner it is important to think beyond the first sale… and start to think about your customer life cycle.
What is the customer life cycle?
This is basically the length of time a customer will stay with your company and keep returning to spend money.
How do I track a customer life cycle?
Depending on your business model there are different ways of doing this, the most common would be:
- Look at past appointments by customers e.g. Hair Dressers, Spas, Chiropractors, Physios, Doctors, Lawyers.
- Set up customer clubs and in store promotions so people scan each time they buy e.g. Pharmacies, Retail Stores, Supermarkets (like the One Card), Farmers card, customer clubs, reward cards.
Two really cool examples here in New Zealand would be:
The Countdown One Card – You swipe that card and they track what you are buying, the things you like, how often you come, how long you have been using the one card for and that gives them some really great data to market to you with.
The Farmers Club Card – They do a similiar job where they will send you promotions based on purchase history and they know how long you have been using their farmers club card.
By tracking a customer against their purchase history you can start to build statistics about the frequency with which people return to your business.
- How often do they shop with you?
- How much do they spend?
- How Long do they stay with your business?
So here is an example of what I mean….
- You charge your customer on average $65 for an appointment.
Let’s say you spend $2000 on a marketing campaign (online or offline).
How many customers does that advertisement have to bring you in order for you to break even?
$2000 divided by $65 = 31 Single bookings to cover costs.
If the average customer generally stays with you for X time and books an appointment at X frequency that customer is actually worth the following….
Stays 3 months and books every week = $838 (3 customers to cover this cost)
Stays 1 year and books every 1 months = $780 (You need 3 customers to cover costs)
Stays 3 years and books every month = $2340 (you would need one new customer to cover costs)
Stays 10 years and books 6 times a year = $3900 (You would more than cover costs with this one customer)
So the question really is… What is a new customer worth to you?
You would worth this out by looking at the following:
- How much do they spend on average?
- How often do they return?
- How long do they stay with your business?
And of course, you need to look at how many customers you will need to make a profit rather than just cover costs.
- What are your overheads
- How much margin will you make off each sale
- How much margin will you make over the customer life cycle?
This will give you an idea of how much you can afford to spend to acquire that new customer taking into account your overheads.
That is our online marketing tip on how to calculate your customer life cycle for this week. Really Important when you are considering any business marketing online or offline so you can figure out how much you can afford to spend to get those new customers.
This will really help you make marketing decisions about what success looks like when you finish that campaign.
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