Don’t pay too much to acquire a customer. The easiest way to get behind the 8 ball on Lifetime Value is to overpay in the first place.
Let’s say you’re spending $500 a month on a phone book ad. That means you need $500 a month in new business to cover that cost, right? It’s so easy!
Wrong! Add in margin and defections, and that number is probably more like $5,000.
One problem is that brand new customers cost a lot more than existing customers to service.
Think about even the simplest example of a pizza shop. Assume the average cost per call in the pizza business is approximately $1.50. For that first-time caller, it’s around $2.50. Think about what that added cost does to the margin on an $8.00 pie. (Now you know why all those pizza places are pushing you to order online.)
There is also order size to consider. Often, the first-time buyer spends less than a returning customer. First-time buyers just want to try you out. You now have a margin squeeze from an order that is both more costly to service and worth less.
You may think, “I’ll just average that acquisition cost over multiple orders and make it up.”
Do you know your retention rate? In the average business, 50 percent of first-time customers never buy from you again. Are you average? Do you even know your defection rate?
That’s the core of LTV—you must know simple stats such as average order size for first-time customers, defection rate, and cost of servicing that first-time customer.
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