What is a new customer worth to you?
When you spend money to advertise, a critical issue is the value of a new customer. The "game" is to make more money from your ads than you paid for your ads. If you spend $50 in advertising to sell a bottle of perfume that yields a $45 profit, have you won or lost? You can't tell unless you know the customer's LIFETIME VALUE.
In brief, if you spend $50 in advertising to make a "$45 in profit" sale to a new customer who will never buy from you again, you've lost $5. You would have done better not to have advertised.
But, if your new "$45" customer makes a second purchase from you which yields another $45 in profit, you've made $40 in profit off this customer. If he or she buys from you again, your profit from that customer will be even greater and the $50 you spent to acquire this customer has more than paid out. This "customer value" metric is what guides your advertising program.
This issue of "customer lifetime value" is shouted by bloggers and ebook writers all over the internet. But their wisdom may be of little value to you. One issue stands in the way of your using customer value to accurately guide your advertising program: your lack of data. New in business, you don't yet have the customer histories you need to establish the lifetime value of a customer.
So what can you do?
The first essential step is to develop a purposeful customer database. This, in time – maybe in just a few months – will allow you to begin to establish the lifetime value of your customers. Here's how I've done it and how you can do it.
Every order you get goes into a database. You'll want it to be on a computer so you can sort and manipulate it. Every order that you post is posted with the product purchased and the revenue received. From the product you can extract what amount of the selling price is profit. Every entry will also include a customer name, address (when possible and practical) and some sort of unique customer identifier.
This customer identifier is essential as gradually you will develop two databases -- one of individual invoices (sales) and the second of the customer's cumulative history. This second database will show the total amount of money the customer has spent with you, the sum of individual purchases. This second database may also be able to show how often each customer has ordered from you.
The "trick" to setting up this system is to find a unique identifier to allow you to aggregate each customer's individual purchases into their cumulative history.
In the past I have assigned a unique customer number of each new customer based on name, address and zip or postal code. If you're selling digital goods, you might not get a name and address but you will get an email and that can become your unique identifier.
If you are a retailer, you'll ask for a phone number. Most people today have their personal mobile phone and thus a unique phone number.
I realize that for the average new marketer, setting up this sort of system can seem overwhelming. I came to it from the advantage of having IT people to do the programming so all I had to do was specify what data I wanted captured and what manipulations I wanted to be able to make on that data. If you're just starting out you'll probably be reluctant to spend time setting up systems when, at present, you're just desperate to make sales.
But keep this in mind. As you begin to collect orders, by organizing them into at least an invoice (sales) database you'll be making a start. And, for this database, collect at least one identifier be it cell phone number or personal email.
Don't wait too long before you do it. Your data will start to show you what each new customer is worth to you and that number will begin to show how much you can spend on advertising, to acquire a new customers.
FOOTNOTE: If the concept of a database is new to you, here are some ads for databases you can look over. Looking costs you nothing. And, if you are going to become a marketer, you'll find databases are an essential tool. I've developed my own marketing database but before I could do it, I learned a lot from our IT professionals. Regardless of timing, a database for your business is an important "something" to keep in mind.
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