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It has been said that 20 percent of our customers generate 80 percent of our revenue; however, for most companies, resources are most often spent interacting with customers who are the biggest (sales), the loudest (service) or the easiest to find (marketing). You may be thinking to yourself, “Well, of course! Sales, service and marketing are the foundation of any successful business!” But are they? Have you considered the actual value of these transactions?
If a customer is large, are they necessarily profitable? If you provide over-the-top service to every customer, all the time, are you making the best use of your resources? Does spending money on a sparkling marketing campaign always mean that the customers it brings in will generate revenue for you? The answer to each of these questions is, “not necessarily!”
Many business owners might know the dollar amount of a big sale or an annual service contract, but might never have considered the lifetime value of those customers. Knowing the true lifetime value of your customers is a powerful tool that can greatly impact your bottom line through better use of your company resources. Consider your own customers and be careful not to generalize. Evaluate each customer individually.
What was the amount of the initial sale? What amount of that sale was profit?
Have there been subsequent sales? What are the amounts of those sales?
Is it reasonable to assume the customer will purchase in the future? How often and for how many months or years?
Are there support or service requirements after the sale? What does that cost you?
Does the customer require a higher level of service or support than the average customer? How much does it cost to support that customer?
These factors will help to determine the actual lifetime value of your customers.
Let’s look at an example. Jeff Jones is a customer of Acme Widgets. He bought $100 in widgets this month. The profit on the sale was $75. It is projected that Mr. Jones will make additional $100 purchases four times a year over the next six years. It costs Acme Widgets $10 every time Mr. Jones makes a service call about his widgets and a typical customer calls for service about three times per year. $75 per sale; four times a year; six years as a customer; 18 service calls. This means Mr. Jones has a customer lifetime value of $1620. This paints an entirely different picture of Mr. Jones the customer who will spend $1620 than Mr. Jones the person who spent $100. What if Mr. Jones is the type of customer who utilizes your support line 30 times a year instead of the average of 3? Suddenly that profitable client is in fact costing you money by using $1800 in service over his tenure as a customer. How much effort should you really be spending to retain Mr. Jones as a customer?
Nobody wants to lose a customer. Yet interestingly, most small businesses are focused on the acquisition of new customers which is more costly than the retention of existing customers. Moreover, a great deal of time is spent on low-value activities for customers who are merely the biggest, loudest or easiest to reach — even if they are not profitable! By taking the time to really calculate the true value of each customer, a business owner can better apply resources to retain the customers who are the most profitable and lessen the impact of those who are not.
(Editor’s Note: Wendy Miles, Director of Customized Training and Military Education at Olympic College, oversees the operation of the Kitsap Business Assistance Center (KBAC). For partnership opportunities, contact her at 360-475-7786. For KBAC counseling services and workshops contact Rand Riedrich at 360-307-4220, rriedrich@oc.ctc.edu.). | 
