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How Much is a New Customer Worth?

July 16, 2013

In a recent discussion with a client, we were talking about potential marketing campaigns to consider. And that brought us to the topic of the value of a new customer and I thought it was topic worthy of a blog post. Why is it important? Before you run any marketing campaigns, you should know how much a new customer is worth to your business. This knowledge can help you decide how much you are willing to pay for a new customer.

Once you have determined how much you are willing to pay for a new customer, it becomes much clearer which types of marketing campaigns may work for you. In addition, you have a benchmark against whi

 

ch you can measure the success of a campaign. For example, if you are willing to pay $200 to acquire a new customer and it costs $250 to acquire them using pay-per-click advertising, then that is not a good way for you to acquire new customers. However, if it only costs you $100 to acquire a customer, then it is a good marketing campaign for you.

Calculating the Value of a New Customer
In order to calculate the value of a new customer, you will need to answer two questions:

  • Are most of my customers one-time buyers or repeat customers?

  • What is the average value of a sale?

For example, an optometrist knows that her patients stay on average for 3 years and visit twice a year. In addition, the average value per visit is $400 including exam and eyewear. So, we could look at the value of a customer as follows:

2 visits per year X 3 years X $400 per visit = customer value of $2,400

Of course, that is the total value of the sale and does not include the cost of frames, lenses, staff time, etc. However, it is a good starting point. In this situation, an optometrist may be willing to pay up to $400 per new customer even though that amount would not be recouped in the first visit, because of expenses. However, it would definitely be worthwhile over a three-year period.

In contrast, a plumber may know that he rarely gets repeat customers. Therefore, the plumber is only willing to consider the cost of a single job with a new customer. If the average plumbing bill is $450, then the plumber may only be willing to pay $75 per new customer.

Not All Customers Are Created Equal
It can also make sense to segment your customers where possible. For example, a slab leak for a plumber may be a $4,000 job where unclogging a sink is only $150. Therefore, the plumber should be willing to pay considerably more for the slab leak customer than the clogged sink customer.

Next Steps
Now that you understand the concept of customer value, you can apply it to any marketing efforts. This may allow you to consider new marketing efforts or help you to decide to cut ones that are not profitable. In addition, you can also look at ways that will increase customer value, such as increasing the value per sale or turning one-time customers into repeat customers.

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