Lifetime Value of a Customer

time management skills, business success

Customers are worth more in some businesses than in others, based on the number of times that same customer buys from you.

If you sell blu-ray players, a customer doesn’t have much long-term value. He buys a blu-ray player and then you’ll probably never see him again. If if you do see him again, it will be many years later. Seriously, how often do people buy blu-ray players?

If you sell toothpaste, you’re in much better shape. That customer buys your toothpaste, uses it up pretty quickly, then comes back and buys more from you, often forever. That’s a very high lifetime customer value. This is why consumable goods companies like Procter and Gamble are massive, multi-billion dollar companies.

Companies like Netflix have it even better. A customer there pays them every month, automatically, without anyone having to do anything, even if the customer doesn’t use their product. “Intravenous sales” companies like this are ridiculously profitable.

One of the big reasons I reached the high income levels so early in life is because I sold computer consulting services. When a small business hires a computer guy, assuming they like him, they use that guy more or less forever unless they go out of business or move. When I signed up a new client back then, that client represented thousands and thousands of dollars of income to me over the next several years. Once I had a nice portfolio of clients, was making six figures and barely had to market or sell at all.

(The downside was I was extremely busy because I or my employees had to constantly service those clients; a failure in my business model back then. But that’s a topic for another time.)

This then, is a universal maxim in business:

The more your business is structured to encourage repeat sales, the less marketing and sales you’ll need to do.

Of course you should always be marketing and selling regardless; this is the most important function of your business. The point here is it’s less critical if your business is automatically set up to encourage repeat sales.

Compare a real estate agent (low long-term customer value) to a company that sells breakfast cereal (high long-term customer value). That agent can only sell a customer one house every 10 years or so, so he/she is constantly hustling the sales and marketing for new customers. The cereal company has to market, but not nearly as consistently and as intensely as that real estate agent.

Is your business model conducive to a constant flow of repeat sales from your customers or clients? If it isn’t, how could you modify it so it could be?

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