Today I want to share with you another business growth tip. And this is about one of the most important numbers that you need to know as a business owner. I’m amazed at how many times I’m working with a business or talking with a business owner, and they’ve never taken the time to figure this out.
It’s the lifetime value of a client or customer. Actually, it’s the lifetime profit value of a client or customer. And this number is so important because once you know this number, you know exactly how much money you can spend in your marketing, in your referral systems, and how to increase the profits of your business in critical areas. So I’m going to tell you quickly how you can get a general idea of what this number is for your business. What you’re going to do is take the average purchase amount for your product or service. So to give you an example, if you’re a chiropractor, and you charged $50 per visit. Or if you sell wheels, and that wheel is $50 per wheel, whatever your product or service is, what is the average amount that people are paying you for it? And then how many times are they making purchases every year? So again, with a chiropractor illustration, maybe they come to you ten times a year. So an average purchase of $50 ten times per year is $500 per year for your average client or customer.
Next, you need to figure out how long they do business with you? So maybe they do business with you for an average of three years. So $500 a year, over three years, is $1500, not too bad for every client or customer? Then you figure out what your profit margin is. So what are your costs of goods and services compared to what you charge and say your profit margin is 50%.
So we’re going to take that $1500 value of each client or customer, and apply our 50% profit margin. So every client or customer is worth $750 in profits to your business. Once you know that final number, you know exactly how much you can spend in your marketing, or in your referral systems, or in discounts or offers to gain new business because you know you’re going to make an average of $750 profits from them. So are you willing to spend $200 to get a new customer knowing you will still make a profit of $550? That’s up to you to figure out the most effective ways of using that money, and how much you’re willing to spend to gain that new client or customer.
Now that you know the lifetime profit value of each customer and the metrics that make it up, you also know what key areas of your business you can improve in order to increase your profits. And this is how I work with a business over two to three years. We look at every profit-affecting area, as well as a lot of other things to create these small increases that end up making a huge difference.
So, for instance, if we were able to add more value, some more benefits or features to your product or service, and get the average purchase amount from $50, maybe up to just $55. And then look at customer service and engagement and offering other products and value webs, we are able to get them to purchase twelve times a year, instead of ten. And let’s figure out why they’re stopping after only three years, and see if we can increase that time to three and a half years or maybe four years.
Next, we can look at your operations or suppliers or other costs and see if we can trim things up or get better deals and get your profit margins to increase again, maybe buy another 5% to 55%. And you’ll see that when those things multiply together, they end up making a huge difference in your profits and margins.
Or what about a referral system where you can reward the people that give you referrals, and give them a great deal to offer other their friends and contacts. And you figure out that every new client or customer averages getting one new client or customer to you, that essentially doubles their value. So instead of a $750 of profit, they’re actually doubling that by recruiting someone else. So they’re actually worth $1500 of profits to you.
So knowing this number, and how to leverage it is extremely important to you as a business owner. And if you haven’t done that yet, can I encourage you to do it today? And if it would help, I’ve got a worksheet that can help you do those calculations that I would be happy to send to you. Send me a message or an email, and I’ll send that your way.
If you would like more information about how I help my clients and how I might be able to help you, schedule a quick call for us to get to know each other and see if taking the next step together is the best move forward.