The Value of a Customer

by : Bryan Brandenburg

You need to determine what the value of a customer is to your company. Answer the following questions:

How much will the average customer spend with you per year?

A = _____________

If you provide quality service and products, how many years can you expect to keep a customer ?

B = _____________

What is your gross profit, as a percentage of revenues?

C = _____________

The value (V) of a customer is:

V = A X B X C

We learned with our network consulting company that the average life of a customer was about 2 ? years and the average yearly expenditure was around $10,000. With a gross margin of 35%, each client was worth $8750 to the company.

$10,000 X 2.5 * .35 = $8750

If you haven’t used this simple formula before, it can totally change how you view customer acquisition, retention and customer service. Normally you’ll want to spend about 10% of current or projected revenues on customer acquisition. This formula allows you to accurately project what a customer is worth to you over their customer life cycle.

A valuable concept to learn and leverage is to go to great lengths to keep a good customer. The simplest and least intensive marketing efforts are those that you do for existing customers. Stay in contact, educate them on the excellent services you have provided them and the value proposition that you offer.

Close Ratios

The next important parameter is to calculate your close ratio. This means for every prospect you talk to, how many become customers? We had a close ratio of around 25%. With the above example, assuming a marketing budget of 10% of gross revenues per customer, we had $1500 to work with. With a 25% close ratio, that meant we could spend on average $375 for every prospect we talked to ($1500*.25=$375).

This is a very useful tool for making decisions around how much time to spend on proposals, contact, lunches and other prospecting activities.