The Most Common Business Mistake and How You Can Correct it – In Ten Minutes or Less
If you’re a business owner, you must determine how much money each client is worth to you over the lifetime of your business – because until you do – you don’t know how much you can afford to spend to get that client to do business with you.
As a business owner you have two options: You can choose to be a transactional company and sell your product or service to a customer just once. Or you can be a relational company, a company that builds relationships with their customers and sell them your product or service over and over again.
Which category does your business fall in? If you’re not sure, here is a simple test. Do you spend more time chasing new customers, or building relationships with existing customers? The answer to that one question will let you know what type of company you have.
The most profitable “prospect” you have is the one who has already given you money. They already know you, and if you provided them with great value when they purchased from you, they now trust you.
Okay, let’s say for example you own a coffee shop. Let’s take a look at how much each customer may be worth over their lifetime – IF you’ll change your business to focus on building a relationship with each customer.
The average coffee shop customer purchases two cups of coffee per week at $1.00 profit from each cup. Let’s assume the average customer lives in the vicinity of your coffee shop for 5 years.
$2.00 (profit per week) x 52 weeks per year = $104.00 profit per year.
$104.00 x 5 years = $520.00 lifetime profit from each customer.
So, instead of viewing your customer as a one time transaction (a $1.00 profit), take the time to build a relationship; their value increases to $520.00.
It’s difficult to determine how much you can earn with other products and services. But let’s assume you sell bulk coffee (coffee by the pound) and the average customer only purchases two pounds per year. For the sake of this example, let’s say you make $5.00 profit from each pound you sale.
$5.00 (profit per pound) x 2 pounds per year = $10.00 profit per year.
$10.00 (each year) x 5 years = $50.00 lifetime profit from bulk coffee sales.
If you spend time building a relationship with each customer, provide exceptional coffee and service, you can expect two “buying” referrals (people they refer to your shop who will make a purchase) from them each year.
Assuming the new referrals become your typical customer, they are each worth $114.00 in profit per year.
$114.00 (profit per year) x 2 referrals each year = $228.00 (referral profit each year)
$228.00 (yearly referral profit) x 5 years = $1,140.00 (value of the 10 referrals)
Using the figures above (which are probably too conservative) we have estimated the total lifetime value of each of your customers to be:
Regular Sales: $ 520.00
Special Sales: 50.00
Referral Sales: 1,140.00
Total Lifetime Value $1,710.00
When was the last time you saw an angry customer storm out the door of a coffee shop, and heard the barista say, “Well there goes $1,700.00”? Umm…Never! Sadly, employees aren’t taught to understand and appreciate the lifetime value of a customer.
Did you ever think that a simple coffee shop customer could be worth so much? Do you understand how important this is to your business? Understanding lifetime value of your customer is the only way to determine if you are spending too much, or too little acquiring new customers.
Let me ask again, what type of business do you want a transactional or relational?
The choice is yours!
To make the shift to a relational company you simply need to make a concerted effort to build relationships with your customers – after their initial purchase. It’s really that simple.
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