How Much Is Your Customer Worth!?

Do you know how much your customer is worth to your business? How much should you spend to get the new customer? When a deal comes your way that could grow your business by bringing in new customers, how do you figure out whether the deal will pay off?

Your gut feeling may have come through for you in the past and you let it dictate how much is just right, too much or too little. What you think is too much may end up bringing in more customers and profit than you expect. How about this? Is it worth the risk to spend too little and seeing your competitor take over those opportunities?

You can answer the question. It involves some math, but once you figure it out — it will pay dividends as you can easily make the right decision on how much to spend to acquire new customers.

Here’s another way of looking it at. How would you do things knowing a customer is worth $1,000, $5,000 or $10,000? The difference between the $1,000 customer and $10,000 customer is huge. When you estimate a customer’s worth, then you can rest easy knowing you’re not spending too much or too little. Knowledge is power.

Here are the three things you need to think about in figuring out a customer’s worth:

• Average customer stay: How long customers stay with you.
• Average gross margin: If you provide a service for $500, subtract the cost of the employee time and any materials the employee uses to provide the service. For $500 products, subtract the cost to produce the product including payroll, commissions, materials and utilities. Don’t include overheads in the math.
• Average sales: This looks at how much the average customer buys from you.

When you know exactly how much a customer is worth, it easier to decide whether an acquisition activity will be worth it. Think about it for a minute. You know that an average customer is worth $5,000.

You receive an offer to advertise in specialty magazines that target your ideal customer. The magazine charges $2,000 per month for the ad for $24,000 for the entire year. The magazine also reports that its advertisers have gained an average of three new customers per issue.

$24,000? Ridiculous. But, wait. Instead of using three new customers per month, let’s be very conservative and say the ad brings in one new customer per month. The total cost of advertising for one year is $24,000. The total profit of getting 12 new customers (since we already know the customer is worth $5,000) in one year is $60,000. So one ad for one year brings in $36,000 in profit.

What if the ad only brings in six new customers in one year? You still get $5,000 profit. Remember, all of this uses very conservative estimates.

If you don’t have $24,000 to make this happen, it may be worth pursuing a line of credit, loan or accounts receivable invoicing for the needed working capital. It may not be worth it for the $5,000 profit, but for $36,000 — more likely. Your business growth may not stop there. Your new clients may like you so much that they become your biggest evangelists and tell others about you.