Figuring the Lifetime Value of Your Retail Customers
By Bob Phibbs
When I worked in the coffeehouse business, we were trying to come up with a way to show franchisees and their employees that we didn't have the luxury of a bad customer service experience.
We needed to show them that customers who walked in once, but didn't come back, represented far more than that one drink.
And it had to be meaningful and based on fact.
We calculated the lifetime value of our customer.
We began by noticing that an average customer order was worth $4.
A regular came into the shop once a day for 5 days out of the week, that equaled around $1000 a year.
Local demographics were that people moved about once every 4-5 years.
Those financial details showed us that grabbing a new customer and providing an exceptional experience, if we did it right, was worth about $4500.
And if we blew it, it wasn't $4, it was $4500!
Do you know what the lifetime value of your customer is?
No? It's easy, here's how to figure it...
1. Start with what you know - your average ticket or average sale from your POS system. Taking it from at least three months worth of information will make it more reliable - even better, a full year.
2. The next is a bit tricky as a retailer but everyone has the regular customers. You can look at your loyalty club, your POS system again, anything to make an educated guess.
3. Next look up the demographic information of your zip code. Specifically, you're looking for the churn of customers over time. In short, how often residents move. I used to say go to the local library and ask them to help you with it but now you might ask a realtor friend, an apartment rental service or look online through your own ingenuity.
4. Now multiply the results you've found to make an educated calculation about your customer's lifetime value.
The Harvard Business Journal has a tool that is more advanced and asks for additional statistics but it is really useful. You can access it here.
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