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Maybe you’ve heard of this term that some marketers use called “Lifetime Value.” The idea is to calculate what a customer might be worth over the course of doing business with you perhaps for years as opposed to a single transaction. The determination of this number might change the way you look at how much you are willing to invest to get each new customer.
For businesses that can offer a customer multiple transactions over time this is a significant concept. For businesses such home remodelers, who might only work with a customer once in their lifetime, this might not seem to matter.
Here’s my take. The lifetime value of every single customer is unlimited when you factor in a customer’s ability to make referrals. A logically and emotionally satisfied single transaction customer might be a source of business for years. In fact, I’ve personally witnessed a single customer send substantial amounts of business to a customer of mine over a ten year period.
So how can this concept inform your marketing approach? In a way you could take this concept to the extreme and actually give away your products and services to customers, make certain they are thrilled, set the expectation for referrals and never have to go looking for business again. Could you target customers with significant referral capabilities and test this?
Interesting concept, now how can you apply it?
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This entry was posted on Saturday, June 28th, 2008 at Jun 28, 08 | 3:30 am and is filed under Referral Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.
Thanks a lot for a fine read. Keep up the good work!
Good insights, John! Our customer’s ability and willingness to make referrals first and foremost depends on the quality of the service/product we provide, but we also have to make sure they know who our ideal customers are. Otherwise we won’t get high quality referrals…
John, you are absolutely on the money. I once hired an electrician to do some work for me. He came when he said he would, fixed what he said he’d fix, and charged what he said he’d charge. Shared his name with some friends.
About four years later I called him again. His hourly rate had doubled, but not for me. Why? He told me my friends had shared his name with so many people, he could now retire 5 years earlier than he planned.
Anyone know a good reliable electrican?
I think John this is a good insight, but it only is the first step. The real trick is to somehow identify the customers that are thrilled (fairly easy to do) AND those who will talk about it (not so easy to do). Lots of people aren’t naturally outgoing and aren’t going waste energy promoting someone’s product. I suppose this is what referral programs are made for. But of course, those are quite flawed in that they often don’t get people to actually enter who first told them about the product.
I don’t have answer here, just questions. I know some of our customers write blog posts and reviews of our products, and I am certain that we don’t truly give them enough credit, because we only count it as a referral if the new user clicks a specific link. It would be great to be able to identify these mega-referrs better and encourage that behavior. Better yet, it would be great to identify segments that might naturally exhibit this behavior and target them in your marketing.
You’re absolutely right! The lifetime value is hard to judge when each customer could potentially send many, many referrals. In real estate this couldn’t be more true.
John, Great Post, Thank You, We own and manage a small boutique apartment management company Urbane Apartments in Royal Oak, MI and we use Digital Marketing and Social Network sites such as MySpace, FaceBook, Flickr, YouTube and now Twitter for traffic and branding, and to Enhance our Residents Experience. We have recently started “Looking Within” to our existing Resident Base, to foster rentals, and Create Customer Evangelists. We have a Resident Referral program, and one specific resident has gotten three net rentals for us, which makes your point, what if we focused much more of our Marketing and Branding resources directed internally on our existing Resident Base, what would you have to do to become self sustainable, meaning your customer, in our case the residents did most of the rentals through referrals, it seems that the resources are really leveraged then, We have done more to enhance the existing customer/residents experience, thus they are happier and they are promoting the product, just how many of them would you need to not have to look outward for business,
Thanks. Sometimes it is so obvious but we forgot that. Building a business around referral marketing and word out mouth certainly is something I need to think about very seriously.
I take this concept into consideration when pricing what I am willing to pay for PPC web advertising (google / yahoo). PPC almost never makes sense if all you derive from the transaction is a single sale. But I’m personally willing to take zero direct return on PPC for the shot to cross sell or get repeat business from that same customer (with zero marketing cost). Good point on lifetime referrals. Give people a solid, reasonably priced service and business seems to find you.
The best way to use this concept is to deliver on your brand promise…every day. The bar is low and advocacy will follow.
If only it were that simple! The biggest problem with this suggestion is the element of giving away your product. This would serve to alter perception of the value of the prodcut and those who were given it for free may not respect the products intrinsic value. Further even if they did recommend it to others, you could well create demand for free products but not paid for ones.
Ideally, and especially in the current economic clmate, business should pay very close attention to all aspects of their product offer and service. Consumers are still spending but can afford to be more selective when and where they spend their money.
Provide exceptional service and the word-of-mouth will happen and your customers will be lifetime customers.
@John - I wasn’t actually suggesting people do that, in fact I preach raising your prices as a core strategy I was simply driving the point home that you could look at it that way - most small business owners don’t look beyond the sale - what you had to give your product away and the only way you could collect would be to make that customer so happy they would refer - do you think you would pay more attention to thrilling them every step of the way?
I agree, the first thought that came to mind for me when I read your post was if you get successful at this then you can really drive down cost of sales and lead generation will never be a problem.
After sales service is a critical to its success.
The value of a life long client, especially a satisfied one that refers friends and family, can not be expressed in monetary terms.
The best form of marketing any business can enjoy is a satisfied long term client, period!
When I was in the drycleaning business we were really focused on acquisition costs. an ephiphany came to me one day when I was studying our data and learned that 84% of customers who came > 3 times disappeared forever.
This completely changed our marketing spend from getting masses in the door to getting those first and second time visitors to that third visit. We were spending about $12 per new customer and most defected.
We lowered our spending to $3 for new customer and spent $15 on moving that smaller number to more visits on average. The net result after 12 months was 60% growth and an overall lower marketing budget.
A lot of people raised their eyebrows when here at Compendium when we stopped doing trade events and just started paying people $50 to take a demo. But by knowing our numbers, we know that this is about 50% of what we were paying in the past.
Lifetime Value works…but you have to know your data.
Chris Baggott
CEO
Compendium Blogware
http://www.compendiumblogware.com
Sticking with a few precious clients and making sure you service them properly will go miles in helping your business, especially if you are relatively new in the field. If the client has a good rapport in the market and is well connected, you could expect tremendous growth.
On the flip side, I recently had my carpets and upholstrey steam cleaned, 9 cats creates the need for that every once in a while, anyway, I found a steam cleaning company in the newspaper, possibly a bad idea, and hired them, they did a terrible job! The furniture was still wet several days later, they broke a window and, I recently discovered, they stole several DVDs.. If they’d done a good job I’d have used them everytime, for years to come, as it beats having to find a new company everytime.. Now I can promise I won’t use them again and if I hear of a friend wantign to use them I’ll advise against it.
Customers can be a lifelong source of business, directly or through referrals, or they can damage your business, in the same ways.