What do you feel is the most important metric to your business? If your immediate answer is turn-over then you may need to think again. Certainly it is turn-over that will pay the bills, and cover payroll every month, but when you have a reliable customer base you can be confident that your turn-over will cover costs.
Perhaps your most important metric is profit? It is profit after all that can afford you the capital to grow your business. Wrong again. Now don’t get me wrong, these are all important numbers to know, but there is another metric that many business owners forget to calculate which to me is way more important than profit or turn-over – Average Customer Value (ACV).
The tragic thing is, you already have all the data you need to work out your customer lifetime value formula – you just need to take that last step of actually getting the calculator out. So how do you work out your ACV? You need to take your monthly turnover and divide that by the number of customers you have.
Average monthly turnover / average number of customers per month = ACV
Let’s look at an example. Darren owns a bike shop and last year, some months were better than others, but he had an average of 100 customers per month. After looking at his books he can see that last year he had a turnover of £240,000, or £20,000 per month. So let’s now enter these numbers into our calculation:
20,000 / 100 = 200
So from the sum above we can see that on average, every one of Darren’s customer is worth £200 to him. Some will spend thousands on one of his top end bikes, others will just come in for a puncture repair kit – but we’re talking averages here.
OK, so as wonderfully interesting as this is; how can Darren use this data to help grow his business?
Armed with this kind of powerful data, Darren can now start an Internet Marketing campaign with his eyes wide open. Rather than throwing some money at an SEO company (like us) and hoping it will result in more customers. Darren can now unequivocally say that for every £200 he spends on increasing his internet presence, he needs to acquire at least 1 new customer per month to his business in order to break even. Every new customer after that first one will be pure profit ?
Similarly, when Darren looks at his internet stats next month and notices that he acquired 17 new customers via the internet, he knows that this increase to his customer base will, on average, be worth £3,400 to him…not a bad return on investment (ROI) from a £200 outlay.
Only by knowing the average customer value of your business can you truly know whether any trackable marketing campaign has worked; not just internet marketing. By understanding that 1 customer is worth £200, Darren can now look at other marketing strategies. And now knows that after spending £200, if he hasn’t seen his customer base increase by at least 1 – then he needs to scrap the campaign.