I have mentioned in many of my articles about metrics.  Things we use to measure success and how far you are from reaching your goals.  Data is much more than that – it is a valuable tool to make solid business decisions.  It also helps you to save as well as make money.  Below are some of the metrics you can use to help grow your bottom line in 2012.

Many business owners understand it is far more cost effective to up or cross sell an existing customer than to acquire a new one.  Unfortunately, most small businesses are so busy getting new business and fulfilling the orders they do not leverage the gold mine of existing customers.  By collecting the information below you are accurately tack your current and past customers.  This can be done with a database and/or accounting system.  Both these digital tools are essential in running reports for making educated businesses decisions.

Average customer Lifetime Value

“Customer lifetime value (CLTV) is a formula that helps a marketing manager arrive at the dollar value associated with the long-term relationship with any given customer, revealing just how much a customer relationship is worth over a period of time. Understanding CLTV is a very powerful tool.  It becomes extremely useful in considering customer question processes as well as selecting optimal service levels to provide different customer groups.” (Harvard Business School Publishing)  The Harvard site has a tool that you can use to calculate this value.

This metric can help you to determine what types of customers you should be following up with now and targeting in the future.

A simple way to calculate CLTV is as follows:
Average order size is $500
Average purchases per year 3
Average customer lifetime 1.26 years
Average lifetime value ($500 x 3) x 1.26 = $1,890

Let‘s examine the components of this formula.  We need to collect: average order size, average order frequency and average customer lifetime.  Let’s look at each of these key metrics to help us determine how much our customers are worth.

1. Average order size
To complete this you will need to track your customer’s orders.  Using a bookkeeping system such as QuickBooks or Peachtree would assist you with the information you need to complete the calculation.  Make sure to take out exceptions or orders, either large or small or both, that are not the norm for your business.  Otherwise the calculation will be skewed and inaccurate.

Number of orders in Quarter 4: 60
New orders in Quarter 4: $30,000
Average order size: $30,000/60 = $500

2. Average purchases per year
This number is how many times a customer buys from you in one year.  See the example below:

Total orders in 2011: 240
Total active buyers in 2011: 80
Average purchases per year: 240/80 = 3 per year

3. Average Customer Lifetime
Average customer lifetime is how long a customer will buy from you from beginning to end.  This is calculated by determining who your inactive customers are and how long they purchased from you.  Get this data into a spreadsheet in a list format so you can calculate the lifetime for each inactive customer. You can also see if your bookkeeping software can provide you with the date for first and last order and export that information into a spreadsheet or run a customer report from within the program.

Date of last order:  1/17/2011
Date of first order: 10/15/2010
Customer lifetime:  1/17/2011 – 10/15/2010 = 457 days (1.26 years)

After you have calculated this number for all your inactive customers – calculate an average and that is your Average Customer Lifetime.

Ok so you figured all this out, now what?  How can you use this information to help grow your business?  Start with who of your current customer base is coming to the end of their lifecycle.  This would be a good opportunity to reach out to those customers and let them know how much you appreciate their business in the past and look forward to serving them in the future.  It is also an opportunity to cross or up sell them products or services to extend the lifecycle.  You are also able to survey those customers to see what other products or services they would be interested in.  Additionally, you may want to survey your inactive customers to touch base and let them know about your products and services that have been added since they last purchased from you.  Possibly bringing them back into the buyer cycle.  Reach out to only inactive customers that look like they have the potential to become active.  Some customers will only be low or single order.  In other words, make sure you are targeting the right people to get a return on your time investment.

Calculating the Customer Lifetime Value can aid in forecasting and determining your goals for 2012 and do they line up with previous sales?  What do you need to do differently to reach your goals?   Compiling these numbers will take a bit of time but are worth the effort.

There are many metrics a company can use to measure success in their business.  These are just a few.  These numbers can help you make smart decisions about marketing and customer retention.  Start with the metric that would most help you in making educated decisions and then move onto the next.  You will start to discover trends that can provide vital information on what to do next to make 2012 a prosperous year.

Croll Productive Synergy has been successfully helping diverse businesses operate better, faster and cheaper than their competition throughout the Hudson Valley.  By “creating the shortest path to success”,  Ms. Croll has been able to facilitate improved workflow systems, allowing clients to save time, focus on revenue generating tasks, prioritize for maximum cash flow,  effectively delegate and, consequently,  increase profits.  To learn more visit www.crollproductivesynergy.com.

Copyright © 2012 Cynthia Marsh-Croll, Croll Productive Synergy

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