How Much Is A Customer Worth To You?
Originally uploaded by emdot
What is a customer worth to you? I ask that question, because until you understand the lifetime value of a customer, you’ll always have trouble justifying spending money on marketing.
This is how companies like Coca-Cola and Proctor & Gamble can justify spending billions each year to sell products that cost as little as 99 cents. They aren’t advertising to capture a one-time sale. They’re advertising to capture customers for a lifetime. They’re advertising to develop brand loyalty. Their annual sales don’t simply reflect the marketing expenditures they’ve made over the year. Those sales reflect the cumulative impact of advertising over several years.
For example, let’s assume a restaurant owner runs an advertising promotion that brings in 150 new customers in a week who spend an average of $14.95 per customer. That represents $2,242.50 in revenue. Next, assume the restaurant has done its job in creating a dining experience that makes customers want to come back, and that these customers come back 2 times a month for the next 5 years, spending an average of $14.95. Each customer then is worth $358.80 per year, which in five years represents $1,794 in sales per customer. That single promotion then has earned the owner $269,100 in sales over a 5 year period ($1,794 x 150 customers). That doesn’t even begin to take into account the people who they may start to invite to the restaurant for dinner, who then become regular customers as well.
A few months ago, I had a client who told me a single customer could be worth as much as $50,000 in profit to his business. Yet this client had trouble understanding why he should spend a few hundred dollars to write and distribute a press release.
If a bank announced an investment product that could yield $50,000 in a short period of time for an investment of $500, there would be people lined up for miles to purchase it.
Marketing/branding is an investment. It’s an investment in attracting and retaining customers who could possibly generate revenue for you far in excess of your investment. And that doesn’t even take into consideration the extra revenues those customers could generate for you through word-of-mouth marketing.
So when it’s time to budget for your marketing projects, don’t just think about the immediate return on investment. Think about the lifetime value of a new customer gained.
–Kevin McIntosh
January 22nd, 2009 at 7:30 am
Great point, great restaurant example–few people think of it that way. Plus, what’s the true cost of winning-back a customer? Certainly better to retain them! Just wish there were better ways to compare results of alternative ways of spending those marketing dollars…