Which point of the video/article did you agree with the
most, and why?

In the management of a small business or department,
understanding the “costs” can make all the difference to your
bottom line, especially in relation to how much you budget for your
advertising and promotion. Many people simply calculate how much
their product costs to make, how much it costs to deliver, how much
they have in overhead costs, and how much profit they need to make.
Then, they decide how much of the remaining margin to budget for
advertising, promotion, social media, marketing, etc.

Unfortunately, that approach doesn’t consider the total monetary
value of a customer to the business and, as a result, doesn’t allow
you determine how much to spend on acquiring a new customer and
keeping a current one. To do this, we need to look at the marginal
value of each customer over the lifetime of that customer.

Example: Let’s say you’re an acupuncture physician and your
patients come to you for an average of 5 years, typically having 2
visits with you each month. For each visit, they pay $100 for a
treatment with the direct cost per visit being about $25.

Many small business owners would focus their calculations on how
many patient visits they have per month, subtract out the various
costs, consider their desired profit, and then decide how much of
the remaining amount they could use for their marketing
expenditures. As mentioned previously, such a practice doesn’t
necessarily consider the lifetime value of each customer and thus
won’t provide you with insights to determine how much you can and
should spend on targeted marketing and promotion.

So how much can and should you spend on acquiring a new
client?

Let’s look at a simple formula that provides real insight on the
how much monetary value each client brings and consequently how
much you might spend on acquiring that client proportionately.
You’ll need the following figures (they can be estimates):

Revenue Per Purchase: this is the average amount your customer
will pay you for each visit or purchase.

Direct Costs Per Purchase: this is the average cost to the
business for each visit or purchase, and includes both the costs of
physical goods and of services rendered.

Projected Lifetime Purchases: this is your estimate of how many
visits or purchases each customer will make over their “lifetime”
(meaning the lifetime of their business with you). An easy way to
calculate this is to consider how many visits or purchases a
customer makes each week or month or year and then determine how
many weeks/months/year they will do business with you (their
lifetime as a customer).

Now all you do is subtract the Direct Costs Per Purchase from
the Revenue Per Purchase and you’ll have the Contribution Margin
Per Purchase. Multiply this result by the Projected Lifetime
Purchases and you’ll have an estimate of the Customer Lifetime
Value. (Granted, you can make this more accurate, and more
complicated, by discounting future purchases by the time value of
money, but this can serve as a rough estimate.) Using our example
from above, we have the following:

Revenue Per Purchase: $100 per acupuncture visit

Direct Costs Per Purchase: $25 per acupuncture
visit

Contribution Margin Per Purchase: $100 – $25 = $75 per
visit

Projected Lifetime Purchases: 2 visits per month x 12 months
per year x 5 years = 120

Customer Lifetime Value: $75/visit x 120 visits = $9,000 per
patient

Now that you’ve found that each new customer will add an
estimated $9,000 in Contribution Margin (that’s spendable money)
over their 5-year customer experience, you’re equipped to ask the
right question: How much can and should you spend to find and also
keep that customer?

The answer might depend on how many customers you currently
have, the amount of your fixed costs, potential capacity
constraints, and the nature of your competition. But at least you
now know that if you spend an average of $1,000 to attract and keep
a customer (with a variety of “free” group classes, direct mail
pieces, social media interactions, telephone calls, etc.), you’ll
still be receiving an additional $8,000 from the customer that will
contribute to your fixed costs and/or profit. This is information
that you would not have known if you hadn’t calculated some
estimate of customer lifetime value.

Too many marketers skimp on their expenditures to acquire, and
particularly to keep, their clients. This is a huge mistake in that
adding a few more benefits to your client’s value portfolio can
have a significant effect on how the client values your services,
which can have a meaningful effect on the client’s loyalty to your
business.

If you take the time to calculate the long-term value of your
clients combined with the cost of the right marketing strategy at
the right time in the right way, your clients will stick with you
for a much longer time. When you understand their value to your
business, you’ll be more willing to provide them with additional
benefits, which will help them feel valued as customers and as
people. And that’s what marketing is about!

P.S. While the focus of this article is on the monetary value of
each customer, it’s important to remember that there are a number
of non-monetary value factors that each customer brings. But those
are a topics for a later date.