What’s new a customer worth?
Your best competitor announces he’s going out of business. He calls you and offer to sell you the names, addresses, emails and a report showing the purchase history of his best 100 customers. What would you pay for the list? How would you determine a fair price? If you’re fortunate enough to know the value of your best customers you can probably come up with an offer, but if don’t you’re flying blind. Based on the fact this was your best competitor it’s fair to assume that the demographics of their best customers match those of your customers. There are a number of factors used to calculate the LTV (life time value of a customer). Banks and credit card companies have figured this out that’s why they inundate you with directly mail. They know on average what each new customer will yield in profit. Let’s examine some of the numbers that go into their LTV calculation. The first factor is duration, how long will a new customer remain your customer? For a retail store duration is called customer retention. The average retailer loses between 10%-30% of their customers every year. The die, move away, are dissatisfied or simply no longer have a need for what you sell. If you lose 15% of customers annually their average duration is 6.6 years. The next steps in the calculation may require some estimates on your part unless you have good POS data. What is your average sale, what is average GM% and how many times do your best customers shop in your in store in a year. If your average sale is $35 and your average maintained GM% is 40% and your best customer shop one a month then ($35 x 40% x 12 x 6.6= $1108), this is the Life Time Value of your best customers. We can even get more sophisticated and calculate the acquisition cost of new customer. The credit card companies and banks have also figured out what they are willing to spend to acquire a new customer since they know the payoff. This is very worthwhile exercise for a retailer to go through because understanding the LTV of a customer can be the basis of many actionable decisions. Here’s a few:
– Should I have a loyalty program?
– What rewards should I offer my best customers?
– How and where should I spend my ad and marketing dollars?
– What can I learn from the demographics of my best customers to attract more like them?
– What the costs of losing a good customer? (Great to know when resolving a customer’s problem)
If you only learn one thing from this post it should be that not all customers are created equal. Special customers deserve special treatment. It’s simply good business. If you like a “White paper that goes deeper into this you can email me at Rcalio@cox.net and put Customer loyalty in the subject line.
R.J. Calio Consulting, LLC