How much money can you afford to pay to get a new customer? Advertising, launching promotional drives, prospecting and more… how much does it costs and how do you calculate this amount?
How long a new customer is expected to stay with your business is really up to the way they are treated and partly up to the type of business you run. Your customer service and the quality of the product or service you sell will help your customer stay with you for longer! However, on average a customer will stay with your business for between five and seven years.
Initially, your new customer is not likely to buy very much from you, but in time you would expect a handsome return on your investment from this customer. However, there is a rub: How much does a new customer cost? £25, £50, £100, or even £1,000? Also, what if the customer only places just one order and never returns?
So what is your “Customer Value”?
To calculate your “Customer Value” (or Customer life time value in America) is relatively easy and will give you a good idea on how much a customer will earn you. On the assumption that there will be no major changes in the following years, You can do the calculations on the transactions from the previous year.
Turnover in the year to 31 December 2007 – £450,000
Number of customers in 2007 – 2,000
Average spend per customer (£450,000 / 2,000) = £225
On the assumption that your clients will stay with you for 5 years and using a discount factor of say 5%, the present value of the income from this client will be £974.13 (if you are not sure where this number comes from use an Excel spreadsheet and the “PV” function, with £225 as the value and a discount factor of 5% over 5 years)
This therefore means that your clients are worth around £974 each in terms of turnover. You will need to deduct costs to arrive at the desired profit to calculate how much you can spend to acquire new customers. So if for example, this company had a gros profit margin or 45% the gross profit per client would be £438 towards overheads and profits.
You will now need to decide just how much of this £438 you are willing to spend to gain new customers – obviously, it would make no sense to spend the whole £438, but at least this calculation provides you with a guideline.
Increase your customer spend
You might also want to consider ways of increasing customer spend so as to increase the “Customer Value”. See this post on the 5 Ways to Increase grow your business