Determining the Total Net Worth of a Customer
Do you know what the "total net worth" (TNW) of your average customer is? Most small businesses don't-but you should.
The total net worth of a customer is the sum total of all the purchases a customer makes, minus the costs of providing all the goods and services purchased, minus the cost of acquiring the customer.
It is, in short, the total net profit from the average customer you persuade to buy something from you.
There are two main reasons this is such an important number.
First, given that there are two ways to grow your business (through increasing the amount you sell to your customers or through increasing the number of customers you have), knowing the TNW gives you a focal point for your efforts to increase the services you provide (and the profits you derive) from each customer.
You want to build your business by increasing your value to your customers.
The second reason it is so important to know the TNW of your average customer is that it gives you a benchmark to measure your costs of marketing against.
To put it more simply, if your average customer will provide you with profits of $1,000 over the lifetime of the relationship, it makes sense to spend anything under that $1,000 to acquire more customers.
To give a simple example, let's say you now have 1,000 customers who cost you $100 per customer of marketing to persuade to walk through your doors.
And say that the average customer will generate $1,000 of profit.
At the end of the day that means you spent $100,000 to generate a million dollars of profit.
Not bad.
You won't want to stop doing that.
But if you want to grow your business, would it make sense to spend twice as much for the next 1,000 customers? Three times as much? Almost certainly it would make sense to spend $200 or $300 or more to acquire customers-provided the customers continue to bring you $1,000 on average.
The numbers may not be quite that simple, of course-you must consider the time it takes to recapture your investment in acquiring customers, and you must make sure that the TNW remains constant or improves.
But if you know the value of your customers to you and you use it in considering marketing investments, you will make more rational business decisions about how much marketing to do.
Most small businesses do not spend enough money acquiring more or better customers.
Knowing the lifetime value of your customers will help you avoid that error.
The total net worth of a customer is the sum total of all the purchases a customer makes, minus the costs of providing all the goods and services purchased, minus the cost of acquiring the customer.
It is, in short, the total net profit from the average customer you persuade to buy something from you.
There are two main reasons this is such an important number.
First, given that there are two ways to grow your business (through increasing the amount you sell to your customers or through increasing the number of customers you have), knowing the TNW gives you a focal point for your efforts to increase the services you provide (and the profits you derive) from each customer.
You want to build your business by increasing your value to your customers.
The second reason it is so important to know the TNW of your average customer is that it gives you a benchmark to measure your costs of marketing against.
To put it more simply, if your average customer will provide you with profits of $1,000 over the lifetime of the relationship, it makes sense to spend anything under that $1,000 to acquire more customers.
To give a simple example, let's say you now have 1,000 customers who cost you $100 per customer of marketing to persuade to walk through your doors.
And say that the average customer will generate $1,000 of profit.
At the end of the day that means you spent $100,000 to generate a million dollars of profit.
Not bad.
You won't want to stop doing that.
But if you want to grow your business, would it make sense to spend twice as much for the next 1,000 customers? Three times as much? Almost certainly it would make sense to spend $200 or $300 or more to acquire customers-provided the customers continue to bring you $1,000 on average.
The numbers may not be quite that simple, of course-you must consider the time it takes to recapture your investment in acquiring customers, and you must make sure that the TNW remains constant or improves.
But if you know the value of your customers to you and you use it in considering marketing investments, you will make more rational business decisions about how much marketing to do.
Most small businesses do not spend enough money acquiring more or better customers.
Knowing the lifetime value of your customers will help you avoid that error.
