Tip #4 - What's a Customer Worth? - Hint: Forget the sale!

Forget the sale. Don't obsess about the sale, obsess about the customer instead.

Easily said, we know. And we realize that each sale is important. But when you are trying to evaluate your marketing budget, knowing the value of a sale is only one aspect of measuring the true value of that marketing budget.

Let us say that you have noticed, that on average, that most attorneys use you only once, and that some, after sending you the first piece of work, are good for ten more a year on average, year after year. What is the lifetime value of that customer?

When you determine the true cost of marketing, you need to know your average customer's lifetime value. You could calculate it like this.

Let's say you have 10 new customers a month. And, that 7 of them will only use you once, 2 of them will use you 3 more times, and 1, on average will use you 20 more times.

Now let's assume the average profit on a sale is $35.00. So you profit $350.00 a month on new customers. You've also discovered that your spending $400.00 a month on marketing costs. Time to cut back!

WRONG.

You have to look at the average lifetime values. Let the letter y represent average number of times a new customer uses you. Thus y will equal either = 1, 3, 20 in this example.

The 7 new customers that use you once are worth 7 x 35 x y (1) for a total of $245.00
The 2 new customers that use you three times are worth 2 x 35 x y (3) for a total of $210.00
The 1 new customer that uses you twenty times are worth 1 x 35 x y (20) for a total of $700.00

So once you know the lifetime values of your average customer's profit over time, you will know that your $400.00 in marketing is actually generating $1155.00 in profit.

You're still ahead, even without the prized customer that will use you 20 more times! (but only $55.00)

So in summary, it's not how many sales you make, but also how many times a customer makes repeat purchases that must be factored in. Also, what percentage of your new customers make a word of mouth referral? What's the value? The equation can get bigger, but this is not an algebra blog.

So remember, you can't go by your "gut". Figure out those lifetime averages. You might actually discover you want to increase your marketing budget, even if you sell less (the first time) to new customers than you spend to acquire them.