Friends for life
Page 41
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Just how valuable are your valued customers, and your not so valued ones? You may be surprised. Grab a calculator and follow our nine easy steps to working out the potential value of your customers...
Seeking new customers is important, but existing customers are the mainstay of any transport business. Are you working hard enough to keep your best customers and encourage them to spread the good word on your behalf?
Existing customers are the real assets of any dynamic transport company. Knowing their "lifetime value" is the key to helping you make important decisions on how much you can afford to spend on recruiting new customers and, perhaps more importantly, on how best to go about increasing the earnings you achieve from each existing customer.
What is "lifetime value"?
The lifetime value of a customer is the amount they will contribute to your bottom line over the span of your business relationship with them. Before you can calculate the lifetime value of a typical customer, you need to consider the following
(a) What is the value of your load?
For this exercise, simply divide your total sales revenue by the total number of loads in your typical year. The example below uses a nominal value of £100.
(b) What is your percentage profit margin? The example below assumes a 20% margin.
(c) What is your typical customer's purchase frequency?
You can calculate this by dividing your total number of loads by the total number of customers in a typical year. For the example, a modest three times per year is used.
(d) What is your typical customer's "lifespan"?
How long does your typical customer continue to do business with you? If you're not too sure, then err on the conservative side, using two or three years. The example uses a conservative three years.
(e) How many referrals does your typical customer give you in a year?
Referrals are business for which existing clients recommend you. If your customers are happy with the service they get from you, they will often bring you "referrals". Most satisfied customers will be pleased to give you referrals—if you ask for them. Make sure you do.
If you ask for referrals, it would not be unreasonable to expect five a year from an existing client. This is the figure used in the example below.
(f) What is your referrals hit rate?
How many of these referrals become customers? Given that these leads are pursued on the basis of a known "recommender", the example uses a hit rate of 40%.
Calculating the lifetime value
Armed with this information, you can now calculate your typical client's lifetime value.
To illustrate the relative impact of the various factors used in calculating this lifetime value, the figure is calculated below in sepa,'. rate steps:
(g) Annual profit—typical customer: (a x b) x (c). In the example: (100 x 20%) x (3) = £60.
(h) Lifetime profit: (g) x (d). In the example: (£60) x (3) = £180.
(i) Referrals value: (e x f) x (h). Successful referrals become customers, so in the example, the referrals value is: (5 x 40%) x £180 = £360.
Lifetime value: (h) + (I). In the example: (£180) + (£360) = £540.
What use is the lifetime value figure?
The lifetime value figure illustrates how important it is to •. make conscious efforts to retain and develop existing clients. Achieving the same margin through one-load deals would take 27 new sales. What it also illustrates clearly is how important it is to seek referrals from existing satisfied clients. In the example above, the lifetime value of the client was increased by 300%, simply on the basis of referrals which led to new customers.
Also, your typical client's lifetime value allows you to calculate exactly how much you can afford to spend on winning new business. In the worked example above, the seller could afford to spend as much as £540 to win a new client, even though the value of a typical sale was only £100, and the margin just £20.
But the lifetime value figure also points up just how you could dramati, cally improve the performance of your operation simply by making small efforts to change any of the key figures used to derive it.
Suppose you made the following modest changes to the example:
* Increase the average contract value by 10%. * Improve the margin by just 5%—by focusing more on existing customer base where the cost of sale is lower, for example.
* Increase the sales per year by a single sale—stay closer to the account.
* Stretch the lifespan of the customers to five years—by looking after them better.
* Increase the number of referrals by, say, 40%, two more in the example. If you don't currently chase referrals, this should be easy to achieve.
Calculate it yourself—these modest changes would: * Increase the annual profit from the typical customer to £110—a massive rise of almost 55%.
* Increase the profit earned from a typical customer in their lifetime by more than 300% to £550.
* Increase the value of referrals increases to £1,540 * Increase the lifetime value for your typical client to £2,090.
This 387% increase in the lifetime value of the typical customer resulted from the cumulative effect of relatively small, and eminently achievable, increases in performance in the accounts.
0 by Deiric McCann