That doesn’t mean that attracting new customers is a waste of time. But it does mean that your long-term goals might be suffering as a result of your current marketing strategy.
With that in mind, let’s talk about how to calculate the value of a lifetime customer. How much is it worth to hang on to one customer?
The Cost of Acquiring New Customers
You’ve probably heard the statistics about the cost of acquiring a new customer compared to the cost of retaining an existing one – but they bear repeating.
Research shows that it costs five times as much to get a new customer to make a purchase as it does to build loyalty with the customers you already have.
Why is new customer acquisition so expensive? It makes sense if you think about it. For example:
Loyalty Drives Sales
What happens when a customer makes a purchase from you? It turns out there are some psychological quirks that kick in that make it more likely they’ll buy from you again.
What Your Customers Are Worth
How much is a lifetime customer worth? As you might expect, the specific answers can vary. One loyal customer might spend ten times as much as another. But that said, there are some statistics that can show you the average lifetime value of a single customer.
The initial conversion rate for any potential customer is very low – usually between 3% and 5%. However, the conversion rate goes way up when we’re talking about repeat customers.
But those 3 customers who do convert are nine times as likely to make a purchase as any new customer would be. Just like that, your conversion rate skyrocketed!
As you can see above, the numbers continue to increase over time. That’s due in part to repeat customers having a comfort level with your products, as we discussed above.
Now, let’s use some hard numbers to get an idea of what a lifelong customer might be worth to you. Let’s say that you spend $1,000 a year on marketing to new customers, and a year, you attract 100 new customers. That means that your cost per customer acquisition is $10.00.
That number might seem high, but you can’t understand your acquisition cost without including the average purchase made by customers and the likelihood that they’ll buy from you repeatedly.
If your product sells for $20.00 with a 100% mark-up, and you spend 25% of your profits on overhead, you’re looking at an initial return of $7.50 per customer. In other words, you’ve earned back 75% of what you spent to acquire that customer.
Now, let’s look at what happens if that customer buys from you repeatedly, assuming all prices, mark-ups, and overhead stay the same:
Attracting new customers might feel more exciting than retaining old ones, but you’ve got to ask what’s more important to you: the thrill of attracting a new buyer, or the money that comes with retaining an existing one. Personally, we’ll take the money.