I have often been asked the definition of marketing. My answer is marketing is nothing more than buying clients.
So the question is how much can you afford to spend to buy a new customer?
In order to answer that question you need to know the financial value of your average client throughout the period of their buying lifetime. We’ll refer to this as the Lifetime Profit Value (LPV).
Here is an example. If you profit $50 dollars a year from your average customer, and you keep the customer for five years, you can afford to spend $250 to “buy” an average customer and still break even.Now we aren’t in business to break even.
However, if you could buy that same customer for $50, you would make a profit of $200 over the life of that customer.
Understanding the customers LPV will give you far greater insight into the customer’s real financial value. When you truly understand the client’s financial value you will be able to make better business decisions. Some things that will change are:
- Your customer service will become more important
- What you spend on marketing will become more scientific and less emotional
- You will want the marketing to be accountable, what’s working and what is not
- Once you know the LPV you will want to determine a way to increase it.
How to calculate Lifetime Profit Value of your Average Client:
- Calculate your Average Sale (AS ) per customer (total sales divided by total customers).
- Multiply by the Average Profit Percentage (APP).
- The result is your Average Profit (AP) per sale.
- Multiply by Average Frequency (AF) of purchase per customer, per time period (i.e. year).
- The result is the customer’s marginal net worth per period.
- Multiply by the buying life span of your average customer.
- The result is the customer’s lifetime LPV.