In the last edition of The Networker, I talked about Customer customer Loyalty loyalty and the importance of building a “Back-end” for your business.
To recap: “Front-end” simply means the first sale that you make to your customer. the first product or service that they purchase from you. “Back-end”, on the other hand, refers to all products offered for sale to the customer after the first – in other words “repeat business”.
Many companies spend a large percent-age of their marketing dollars and efforts on attracting new customers, only to abandon them after the first sale. They fail to remember that 80% of your sales come from 20% of your current customers, and that it is 10 times easier (and more cost-effective!) to sell to someone who has bought from you before!
Fundamental to the concept of Back-end is the Lifetime Value of Your Customer (LVC). Essentially, this refers to the value of any one customer, over the course of their relationship with you.
Consider this example:
XYZ Incorporated conducts a marketing campaign that attracts 100 new customers at an average revenue of $100. The resulting revenue from the campaign on the Front-end is $10,000.
Now consider that 20% of the new customers purchased the following month from XYZ Incorporated, at an average revenue of $50. That represents an additional $1,000 Back-end revenue from the same campaign.
Consider again if those same 20% of customers spent $50 a month with XYZ Incorporated over the next two years. The resulting LVC is $1,000 a month or $24,000.
On the Front-end, the revenue derived from the campaign is $10,000, however when you include the Back-end over a two year period, the revenue from the campaign is $34,000 (that”s 250% more!)
Although this is a fairly simple concept, LVC has many repercussions on your marketing strategy. Many companies set their marketing budgets without regard for this vital statistic and while it is prudent to be conservative and contain marketing costs, it is also essential to consider how much you can spend in order to bring in a customer that has an LVC far in excess of their Front-end value.
When analysing the effectiveness of any campaign, it is essential to consider the LVC, as it can not only help you formulate a more appropriate marketing budget, it can also help you tailor your marketing strategies to suit the purchasing behaviour of your clients.
To further illustrate this point, let”s assume that the above mentioned marketing campaign cost XYZ Incorporated $500. That would mean that based upon the Front-end revenue, the marketing costs per new customer are $5 ($500/100) and the yield is 20 ($20 revenue per $1 spent). When you take into account the LVC – the yield increases dramatically to 68.
What this means, is that in cases where the LVC is substantially greater than the Front-end revenue, the marketing budget can be increased and more resources allocated to the promotion, in order to bring in the new customer.
In order to determine the Lifetime Value of Your Customers, you need to conduct research into the buying behaviour of your client base. Try to segment your customers into separate categories and determine how often each segment purchases from you and how much they spend each time.
Once you have determined the respec-tive LVC, you may more effectively target their buying behaviour. This will also give you a new perspective on how much you can spend to bring those customers in.