Customer lifetime value for a trade business.
This is an important concept. Customer lifetime value costs you money
to acquire a customer, doesn't it? You either spend money
on marketing. You have your website, Google AdWords, SEO, your Facebook Ads, Newspaper Ads,
your signage etc., all that stuff.
Or
you spend time calling people and building relationships.
Of course, you pay someone to spend time calling people and building relationships,
either way, it's costing you money. If it's your time, time is money and if you're paying somebody, of course,
it's costing you directly.
So a natural calculation for you to ask is how much did it cost me to acquire this customer
and how much are they worth to us and you have to think here in terms of profit on a job,
profit from a customer, not the revenue, that's very important.
so you want to know that you make more from the customer than it costs you to acquire, doesn't it?
It's very important if it cost you more in terms of marketing
to acquire a new customer than you make from then you're hiding to nothing
and you're going to go back quickly.
So this is where this idea of customer lifetime value comes in.
Once you've acquired a customer, it's much cheaper to keep them and sell them something else again
or much easier in terms of resources than it is to find another new one and sell them something.
It's much easier. You've built trust, you learn to like each other all that stuff is already established. You already know each other.
If it's likely that a customer will buy what you sell again,
and if you put effort into getting to them to buy it from you,
then they're worth more than that initial job and this is the important thing. It's easy to think
of the money you spend on acquiring a customer and compare it to the money you made on that job
and what I'm saying here is over the lifetime that they're going to be buying
from you, they might spend more than that. And it's a good idea
to know what that number is, how much they're going to spend over say a five year period
and compare that to the cost of acquiring them.
So what you do, you work out with your average customer lifetime value is, your average
and you compare that to the average cost of acquiring customers in the first place
and keeping them.
So you've got two number - cost to acquire and keep a customer and that's marketing and sales
and their value to you over the lifetime that they remain a customer of your business.
Remember their value is in the margin, not the revenue.
So for customer cost, you say $120 to acquire and the first job you do for them the $290 maintenance job
with a gross margin of $120, you down $40.
But if they likely spend money every year for the next five years of an average of $300 every year,
then you're now talking a further $1,500
and a similar sort of margin
and that $120 to acquire them doesn't look so bad now, does it?
So that's the concept to get your hands around. Don't worry about my numbers, I know my numbers are sh*t.
You can calculate your average customer lifetime value by going back
into your invoicing over the last year, in two years, and three years
and working out how much you've invoiced to each of your customers
over the last five or ten years. I know that sounds a bit boring but you can do it in easy row or what have you.
Your job management system relatively easily.
We could pay someone to do it. You can even pay someone on Fiverr or somewhere
to do it for you if you can't be bothered to do it yourself.
it's only an average
but an average is probably more useful here than looking at specifics. Now I've been talking recently to Matt Jones
of the Site Shed Facebook group and podcast.
I know of his main business trading web guys. He's a digital marketer for tradies
and we've been comparing notes of it on the advice we give
to our customers because we both give advice about how to do marketing.
We don't agree on everything which was interesting.
We decided to run a webinar, an interview.
We're going to record it as a video. We're going to put it on the site shed as a podcast.
We're going to put it on Small Fish so you can have a look and watch it in your own time.
We're going to discuss what we agree on and what we don't agree on
and see if we can get to a common position and give you some improved guidance
on what you should be doing. So back to customer lifetime value particularly what you should be doing
to keep your customers coming back to you next time they need, what you do
instead of going somewhere else, instead of jumping on their phone and searching for
your trade and just picking any old tradie.
What you should be doing to get them coming back to you so that customer lifetime value for your business
is higher.
It's called relationship marketing.
It's an important part of your marketing. Matt and I agreed on that quite happily
but what we differ on is exactly how you should be doing it, particularly I think,
if you're a maintenance trade so your job size is small
and repeat business is perhaps infrequent. If you're doing maintenance, trade, maintenance work
for residential customers like yourself, they probably don't call out plumbers very often.
If you watch my stuff,
you're probably aware that I say that you should be doing a relationship marketing light.
You shouldn't be investing much money and much effort because the return is low, because people
don't do repeat work very often. You might be better to invest your money
in Google Adwords and your website presence or SEO rather than
specific relationship marketing. And I've been saying use fridge magnets and stickers
and don't worry too much about it.
Matt has a different view
and he has a proposal or a suggestion for how you should be doing something more than what
my current advice is.
His point is it's useful and I'm going to talk to you about why later
and it's less expensive than I've been thinking is so maybe you should do it.
Let's see if he changes my mind and let's see if I change the advice I give to my coaching customers
and to you on these Toolbox Tips.
We're going to have a webinar, you can register below at tradiewebguys.com.au/smallfish.
There'll be a link in the comments for you or below the video. Register for the webinar,
they'll send you updates and tell you when it is or you can go of course if you're watching this down the track,
you can go to where it's hosted and watch it again.
See you later.