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Saturday, February 21, 2015

A Simple Story of Customer Lifetime Value

We don’t read much today about Customer Lifetime Value.  Maybe it’s not exotic enough to command much attention, but we all know it’s critical to business success.  Our friend, Tommy the barber, understands the concept completely though he won't use the term.  Follow with us through an example of lifetime value using Tommy's barbering business.  We’ll not only consider the value of a single customer over time, but also the added (and often overlooked) value of a customer's ‘multiplier effects’ that add far greater significance to a customer's value.

Our friend Art is a long-time customer of Tommy, an aging barber in his little old-fashioned barber shop.  Including tip a haircut at Tommy’s costs $20.  At this price, an individual hardly seems worthy of too much attention.  But Tommy would be the first to point out the error in that observation.  Tommy knows that Art’s worth far more than the $20 he pays on any given visit.  That’s why Tommy will stay open a half an hour later if Art’s running late, and never hurries his attention to Art’s cut – even when the waiting area is full.

Those $20 Bills Can Add Up!

Tommy’s figured things out.  He understands that Art gets his hair cut every three or four weeks – like clockwork.  So, since he’s been a customer, Art’s value each year to Tommy has been about $300.  And, because Art has been a loyal customer of Tommy’s for the last 10 years, he’s put no less than $3,000 into Tommy’s old cash register.  This could be Art's “lifetime value”; an amount considerably more meaningful than the $20 transaction for a single visit.
But There's More....
But Tommy would point out that Art’s lifetime value is actually a lot larger.  Not only is Art still a relatively young man with years of haircuts ahead of him but his word of mouth is extremely valuable to Tommy's business.  Art was responsible for recommending Tommy to us.  We subsequently recommended him to three others, who each became his customers.  We know at least one of those customers has recommended Tommy to two additional folks who also became customers. So the ‘snowball’ of positive word of mouth accumulates adding an exponential amount to Art's own, personal contribution.  The fact is, Art and the additional customers he's sent to Tommy have been worth almost $6,000 - to date - and that amount grows each month!

In past articles and talks we’ve employed similar examples from local pizza parlors, gas stations, life insurance agents, etc..  These examples taken from businesses with seemingly small transaction revenues dramatically make the point that a customer is worth so much more than his or her typical purchase.

No doubt you were ahead of us as soon as you began reading this column.  But, we hope Tommy’s appreciation for Art's value gives you some ideas about how to compellingly communicate customer lifetime value to your colleagues and subordinates (sometimes even higher-level managers).  It’s a lesson that can’t be underestimated in its importance.

8:46 pm est          Comments

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