Do you understand how to calculate the financial value of your clients and how you can use that value to make sound marketing decisions?

Less than one businessperson in a thousand really thinks in terms of the incremental lifetime value of their customers, or even knows how to calculate it. Yet the calculation and the very idea is easy and yields enormous benefits.

For one thing, if you know the incremental lifetime value of a customer, you can determine in advance how much you can afford to spend to acquire that customer. Moreover, you can reliably predict your cash flow well into the future.

‘Lifetime value’—a case in point

Lifetime value (or marginal net worth) is the financial value of your clients during the time they deal with you—their ‘lifetime’ at your business.

A case in point comes from a coffee roasting company with a mail order division. The company ran an advertisement that cost $12,000. The advertisement invited potential customers to accept a free coffee maker valued at $51.95 if they bought a sampler selection of fresh roasted coffee blends for $34.95.

Part of the deal was that the customers simply consider a ‘until further notice’ home delivery service—an order of their preference would be sent to them monthly and charged to their credit card. (They were under no obligation to sign up for the ‘until further notice’ agreement. They merely had to consider it. And regardless of their decision, they could keep the coffee maker.)

‘Until further notice’ arrangements mean that the arrangement continues until the customer gives the company notice to discontinue sending the product or service.

The hard cost of supplying the free coffee maker and the sampler pack leaves a net profit of $1.00 per response. When you factor in the $12,000 for an advertisement, you’d immediately conclude that 12,000 responses were needed just to break even, wouldn’t you?

Based on that, you’d probably think the coffee company would be mad to do it, wouldn’t you?

But let’s look more carefully at the numbers.

For each person who finds the ‘until further notice’ arrangement to be a convenient way to buy, the average annual gross profit is $245. So the response rate required to break even falls from 12,000 people to just 49!  Download our whitepaper to find out more..

WHITE PAPER: TOP TIPS TO INCREASE YOUR CUSTOMER'S LIFETIME VALUE TO YOUR BUSINESS

You Must Educate to Motivate

Many businesses make an assumption that potential customers know who they are, what they do, how they do it, why they are better to deal with than competitors, and more.  Further, they also assume customers know and understand everything offered by that business. In most cases, this simply is not true - this can literally be a ‘curse’ on sales for that business.

Uneducated buyers are often left with no choice but to purchase on price. By working through this issue for your business, you can make sure you’re properly educating your customers.

You see, if customers are educated and, because of that better understand the benefits your business offers, price and other issues become far, far less important. Quality and value, experience, and other benefits become more important.

You also give the impression that you know what you’re doing, care about the customer, and want them to have the right information on hand, instead of showing arrogance by assuming they know how good you are!

You have to sell & ‘educate’ your way to business success or out of a business problem—you can’t just cut the price

An important point—your customers and prospects won’t understand or appreciate the value, your products or services, a bargain, the way you do business, or the benefits unless and until you first educate them to appreciate it.

Merely offering a product or service at a specific price (even the best price) doesn’t compel excitement or a response until you tell people what they’re getting, its value compared to other products and services, and why or how you can offer such value.

And that’s because customers buy the differences they perceive about your business.

Given that, it’s critical that customers understand the differences between you and your competitors—specifically, why what you offer is better than your competitors.

In fact, it is pivotal to tell every potential customer, in a benefit-oriented way, what your business does AND explain the way your business does it, so customers can more easily spot those differences. Otherwise they just won’t know why they should buy from you!

All successful businesses make a decision at some point to either be big or special.  If you look at successful businesses in your community they are either big to get economies of scale and buying power, or special because they are very good at doing one thing - they focus on their niche doing it very well.

What is special about your business?  What makes you different?  What makes your customers come back?  

Unless you are the only mechanic in town (or plumber, or accountant , or whatever) or have a truly innovative new product, you need to find a way to make your business special.  Price cutting - while the differentiator of choice for many business - is usually just a quick way to go broke, with every reduction in price coming straight off your profit and cash flow.  

If your product or service doesn't have features that no-one else offers, customer service is usually how business differentiate.  While customer service can be quite cheap to implement and often offers businesses the opportunity to charge a premium, it is easy to copy. Fortunately for the innovators, many business owner/operators are too busy working in their business to focus on improving customer service. But there are always fast followers or imitators, so innovators need to be constantly looking at how to lift their game.

Not sure what you can do? Ask your team for their ideas and ask your clients what they think.  Then choose one suggestion and implement it.

There are a few principles small business owners need to understand if they want their business to last:

1.  It is not what you make it is what you keep (cash is king).

80% of businesses fail in the first 5 years - most of these are profitable, they just run out of cash.  No matter how good your sales are it is the profit that counts most - and more importantly the the cash you retain.

A sale is not a sale until the cash is in your hands - whether you sell furniture, property or time it is not a sale until you get paid.

And the cash that is left after you have paid manufacturing costs, overheads and taxes is yours to live on or re-invest in your business.

2. Borrow only to buy assets.

As our grandparents and parents who lived through the 1930's depression will tell you, never spend money you don't have.

An asset is something that either generates income over a period of time or goes up in value.  A car is an asset if the person driving it is earning you an income or saving you money. Stock is an assets if you turn it over regularly otherwise it is  a liability

A holiday is not an asset, neither is furniture or shoes or a computer,.

3. Reduce debt as quickly possible.

They only personal who benefits from long term borrowing is the lender.  To understand this calculate the total payments over the life of your loan and deduct the principal.  Banks want you to extend your loan, and add to it if possible.

4. Always understand your financial position.

Seeing your accountant once a year to see how much tax to pay is not enough financial information to run a  successful  business.  A good business owner knows what their monthly operating costs are and checks each month to ensure they are not exceeded.  They also know what sales they have to do to meet their costs and monitor this throughout the month.  

Poor debt collection and stock management is the downfall of many businesses. If your cash is tied up in stock and debtors careful management is required.

5.  Know what you are good at (and what you are not)

Nobody is good at everything - well not many of us - and limited time generally means you cannot do them all.

Focus on the few things that you do best for the business and employ or contract out the rest. Never abrogate responsibility - you may not be good at finance but you still need know that the job is being done right and what the results are to use that information for decision making. (Your accountant should be able to tell you the key numbers to watch in your business)

6.  Put something away for a rainy day..

There are two types of business - those you can sell and those you can't.

A business that sells well doesn't need the owner working in it every day and generally has physical assets and/or stock or a process to sell. Everything else is just a job by another name.

If your business falls into the former category to maximise your sell price your emphasis needs to be on having a well run systemised business in a good market.

If you really just have a job by another name - for example you are a self employed contractor, your only asset is really your customer base and this is likely to have a limited value to anyone else.  Your earnings are generally restricted to e number of hours you are available to work.  The secret with this type of business is to maximize your earnings and invest those in assets that generate passive income such as dividends, interest and rent.

No one said you had to have a degree in marketing when you went into business, yet active marketing is one discipline that is critical to the success of a growing business.  See if the following sound familiar: 

1. Not tracking marketing promotions.  If you don’t track responses from a promotion, how do you know if it was worth doing?
2. Failing to retain customers.  It costs six times more to get a new customer than to keep an old one.  Don’t get so caught up in marketing for new customers that you forget your regulars.
3. Not having a USP ‘elevator speech’.  Focus on your solution to the customer and make sure it describes in simple terms "what's in it for them".
4. Not including a call-to-action in your advertising.  The incentive doesn’t have to be expensive as long as it is adding value.
5. Not thanking referrals.  Remember, people like to be helpful but they also like to be thanked.

 A business owner approached me recently about encouraging businesses to “shop local”.  In his words – “we would just like the chance to quote”. 

 Always keen to support local businesses and looking to replace my car in the next few months I braved the wet winter weather to visit a local dealer to see if I could test-drive a car I had my eye on.  Sadly this dealership is unlikely to get my business – the sales person couldn’t bring himself to get up from his chair to introduce himself, did not ask for my contact details and failed to give me either a business card or literature on the two models of car I have been considering.  Any information I did get was solely from the questions I asked.

Clearly this sales person is unaware that women make 60% of buying decisions and they influence a further 30%.  In this case the decision is solely mine – and that decision is now to go elsewhere.

I thought customer service was quite straight forward really - treat the customer the way you would like to be treated. Either some people have very low expectations for themselves or they have never considered what it would be like if they were on the receiving end.  

How does your business rate?

Clients often ask “How do I grow my business?” There are lots of different techniques and tactics that different types of businesses might use to do this but in fact there are only 4 ways to grow your business.  These are:

 1             Increase the number of customers – but only the ones you want. 

2             Increase the transaction frequency – this means getting your customers to come back and buy more often than they currently do.

3             Increase the average value – this could mean increasing the quantity customers buy or increasing the price you charge for your product or service.

4             Reducing the cost of making your product or delivering your service - this is often achieved by making the process more efficient.

Start with these four ways and think about what you could be doing in your business to address each one.

 

 

Most small businesses don’t have the time or budget for large marketing campaigns.  But that doesn’t mean you can’t stay top-of-mind with your customers.  Try these small efforts with big impacts:

 

• Use free samples to make your business stand out.  Whether you are a delicatessan or a beauty salon, there is something you can share with customers to make you stand out from the competition. 

 

• Self-publish a catalogue or brochure of your products or services.  It’s your job to communicate your offering to customers.  Consider including a customer survey with the catalogue.

 

• Send special promotions to long standing, loyal customers.  Just like new customers, your long standing customers should be romanced with incentives to keep them coming back and give them a sense of priority and prestige.