No, I’m not referring to Meghan Trainor’s hit song by the same name, I’m talking about your installed base of customers.
When you look at the financial profile of the majority of small businesses, a limited number of customers often dominate the profits achieved. This principle is called Pareto’s Law. In a typical small business, 20% – 25% of the customer base can account for 75% – 80% of the revenues and profits. Given this fact, where should you invest your time, energy and resources to grow your business in 2017? Here are some more hints …
What we also know is that it’s 6–7 times more expensive to acquire new customers than to retain existing ones and 2/3 of the customers who leave do so because they feel neglected. Likewise, a 5% improvement in the customer retention rate could yield a 25% to 50% increase in profits or more. So, it just makes good business sense to protect and grow those profitable business relationships in order to increase the lifetime value of each customer. Right?
What is the Lifetime Value (LTV) of a Customer?
The Lifetime Value of a Customer is the Average Purchase Amount x Frequency of Purchase x Average Length of the Customer Relationship.
The chart below provides an example of the importance of not only retaining but building upon those profitable client relationships.
As you see reflected in this example, just a 10% improvement in the average purchase amount, the frequency of purchases and length of the relationship yields a 34.4% change in the LTV of the customer. Likewise, a 30% improvement in the categories would yield a staggering 141.4% positive change in the lifetime value of an individual customer.
Move Customers and Sales from Transactional to Relational
From the example, it’s easy to see in pure financial terms the value of staying in touch with your existing customers and continuing to build upon those profitable relationships over time. It also points out the necessity of moving away from a transactional to a relational sales and support model. Why? Because customers are people too, not transactions, and we’re all in the human-to-human (H2H) business. Also, it’s time-consuming and expensive to make up the revenue and profits associated with a customer loss.
So, if you want to make this your most profitable year so far, then invest more time, energy and resources nurturing those established client relationships while protecting and growing the base. You’ll come out ahead in the end because it’s all about that base!
How are you nurturing your customer base? Share your ideas with us!