The Value of a Customer
Know Your Numbers
The Value of a Customer
How much is a customer worth? And why does it matter?
When you get a new customer or have an existing customer how much revenue or how much profit are they worth, in the short-term and the long-term? But what’s really important is not the individual order, but what’s going to happen down the line with that customer. What is the long-term return?
In our business, a customer might buy an embroidery machine, and down the road, they might expand their services to include a rhinestone machine or a DTG (Direct to Garment) Printer. If we treat them right, they’ll come back for those new machines, as well as the supplies. Every time someone is a loyal customer, they’re adding to their value.
Here’s how a customer’s value works:
They make an initial purchase, worth a specific dollar amount. Let’s say their order cost $500. That’s the initial value, and then you can factor in how much profit you made from that transaction. When you’re calculating your profit don’t just subtract the cost of the shirt and the ink. Take into consideration your electric bill (how much did you use while running the machine to make the shirts, and light your workspace), how many hours did it take to make the shirts (your time costs money too), even a percentage of your rent goes towards your cost for making the product.
Once you’ve calculated all that, the value of the customer doesn’t just end there. If you’ve got your Customer Experience down, they’re going to come back for more. There are very few people who only make a single purchase in the custom T-shirt industry. There’ll be more company or team photos, more church picnics, more people they hire for their company, more family reunions, etc.
So how do you calculate their lifetime value?
Let’s use a company that has 5 employees, each employee gets 5 shirts, and they go through two sets of shirts each year. So every time the company makes an order that’s 25 shirts, and they make the order twice a year. If the shirts cost them $25 each, that customer’s value each year is $1250.
Lastly, you need to consider the longevity of the customer, how long you’re going to keep them for. Let’s say you think you can keep the customer for three years. Their lifetime value is now $3750. If your profit is 50%, your profit from that one customer is $1875.
You can see we’re not talking about somebody with a single purchase of 25 shirts, but the next three years of your business. This is what you’ll earn by taking care of your customers and you’ll be able to see revenues accelerate over time.
This lifetime value is something you need to take into consideration when doing marketing. You’re spending money to attract new customers. Those new customers can have a greater lifetime value than their one-time purchase.
Figure out what you’re spending your time on, and what the lifetime value is of that whole thing. If you’re spending 30 minutes trying to save $0.20 on a cone of thread, why not spend those 30 minutes on a customer, and potentially increase their lifetime value, instead of just saving $0.20? If you haven’t had a chance already check out our podcast or blog post where we go into more details about tripping over pennies.
Now that you know the lifetime value of your customer, consider the value of word of mouth of having that customer. How likely are they to spread the word about your business? This can depend on the personality of your customer. If you know your customer is kind of taciturn, they don’t really have that bubbly personality, they don’t run into a lot of people – maybe there is no referral factor because you think they’ll never talk about you. On the other hand, let’s say there’s a possibility they know some people and you ask them to do a referral, so maybe they’re a 0.2. What that means is I’m going to assign a potential value of 0.2 of whatever the original sale is or the long-term value of the customer. Our original customer’s lifetime value was $3750 and when we take into consideration the referral value, that’s another $750 added to that customer’s value.
Our business/industry is really dependent on referrals because we don’t do a lot of advertising. We rely on word of mouth or those personal connections to drive the business. So we need to take into consideration the referral factor of every customer. Some customers will have a referral factor of zero, and that’s fine, you just have to make sure the value of the initial sales is high – you’re not going to do this to make five dollars profit.
How do you figure out what someone’s referral factor is?
In Malcolm Gladwell’s book The Tipping Point he talks about three different types of people:
Connectors are people who seem to know everybody. Chances are you have one in your life. This is going to be the person who you would go to if, for example, you needed a body shop for your 1957 Cadillac, because they know somebody with a business or they know someone who’s been in the same situation. If you’re in sales, this is a guy to know and connect with because he can link people to you.
Salesmen are the people who want you to buy a product from the same place they buy it from. They have this need to tell you why it’s great, why you should go there, and why you should buy it. You can tell they’re going to try to sell other people to go see you.
Mavens are information connectors and specialists. They know everything about the marketplace and they’re going to be the person that says, “If you want embroidered hats you want to go see this guy but don’t order T-shirts because they do it this way. You want to order T-shirts from this other place.” They’re the people that know where to get the best deal for the product.
These three types of people have a high referral value, provided you do a good job.
So when you’re talking to a customer, figure out if they fit into one of these personality types. Even write it on their sales sheet, and know you’re going to put a higher value on this customer. This customer value will help you determine a lot of things: how you handle the sale, what you are willing to do or not do to get it, what price breaks might you be willing to give, what hoops might you be willing to jump through, how hard are you going to work to get this sale?
This data you have will help show you it’s worth advertising to find a customer like this. It helps you define some of your customer base, who you want to go after and who you want to avoid.
A customer’s lifetime value defines the time investment you should be making. If the customer has expressed an interest in making one purchase, and you know you’re not going to get any more sales from them, you might call them two or three times to follow up, but if you don’t get a response from them, then you should leave it at that. Whereas if your customer is a large group that, let’s say does cancer walks every year, you know they’re going to need new shirts every year, and probably quite a few, and you know you can get a lot of referrals from that group, because they all may have their own businesses, you might want to follow up with them ten times to get the sales. And it may be that you’re always following up and calling them in order to get the sale, but because the value is so high the business it creates is worth more than those ten calls.
How do I figure out customer value if I’m new to the business?
The initial value you can figure out is your profit estimate based on your cost. How much in supplies, how much in rent, what’s the labor cost? Then as far as frequency goes, don’t be afraid to ask, “How long were you with your last vendor?” If they only ordered from them once, that’s a low percentage deal. But perhaps they were with them for 3 or 4 years, and the vendor just retired. That has the potential for a high value. Let’s say a client says they ordered 40 times from their previous vendor, and each order was $500. That customer now has a lifetime value of $20,000. But then the customer also seems to be a bit of a Maven. So she knows a lot of people, and can probably refer other people to you. If you give her a referral factor of 0.3, that’s another $6000 you’ll earn from this one sale.
Also, ask your customers where they heard about you. Perhaps they found you on Google, or perhaps another one of your clients referred them. If you find out that one of your customers has referred several new customers to you, you can increase their referral factor. Example, you originally gave Bob a referral factor of 0.2, but if he’s referred four new customers to me, his referral factor now becomes 0.4. Bob’s original lifetime value was $30,000, and referral value was $6000. But now he’s actually referred $12,000 dollars worth in sales, doubling his referral factor, and increasing the time and care you want to be spending on Bob.
So what happens if a customer calls you up and asks you to donate T-shirts for a charity event?
If the referral factor for the customer is low, the answer is no. But if it’s a Salesmen, Maven, or Connector’s event and you can put your website on the back of the shirt, then it may be worth considering. If it was Bob from our example above, and he only needs 75 shirts, and these shirts are going to cost $400 (supplies and labor), Bob’s lifetime value was 30,000, and he increased his referral value from 0.2 to 0.4, so he could probably get that up to a 0.5. So based on the customer’s value it may be worth it to donate the shirts. The cost is $400, but the potential value if I get even one more customer is $3000. And once you’ve looked at the math don’t be shy about saying “I’m happy to donate this, but here is what I’d like to do, I’d like to put my website on the back of the shirt somewhere, it doesn’t have to be at an obvious place, so the people will remember, I also would like to stand up for a minute just to introduce my business or I’d like to be able to distribute business cards or I’d like to ask you personally to talk to the people there to make sure that I at least get a couple of new customers out of it.” These are all reasonable requests and if your relationship is good, chances are they’ll agree.
If it’s a person/business you’ve never heard from before, don’t just take the promise of “if you do this, I’m going to do this for you.” Because the calculation on this new client has an initial value of zero, their frequency is zero, their lifetime is zero, and you have no idea what their referral factor is going to be. So it has zero worth.
If you take nothing else out of this blog post, make sure you consider the lifetime value of your customers in both revenues and profits, along with their likelihood of sending you referrals. And if you do so, you’ll have a better business next year.
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