You need to determine what the value of a customer is to your company. Answer the following questions:

How much will the average customer spend with you per year?

A = _____________

If you provide quality service and products, how many years can you expect to keep a customer ?

B = _____________

What is your gross profit, as a percentage of revenues?

C = _____________

The value (V) of a customer is:

V = A X B X C

We learned with our network consulting company that the average life of a customer was about 2 ½ years and the average yearly expenditure was around $10,000. With a gross margin of 35%, each client was worth $8750 to the company.

$10,000 X 2.5 * .35 = $8750

If you haven’t used this simple formula before, it can totally change how you view customer acquisition, retention and customer service. Normally you’ll want to spend about 10% of current or projected revenues on customer acquisition. This formula allows you to accurately project what a customer is worth to you over their customer life cycle.

A valuable concept to learn and leverage is to go to great lengths to keep a good

Close Ratios

The next important parameter is to calculate your close ratio. This means for every prospect you talk to, how many become customers? We had a close ratio of around 25%. With the above example, assuming a marketing budget of 10% of gross revenues per customer, we had $1500 to work with. With a 25% close ratio, that meant we could spend on average $375 for every prospect we talked to ($1500*.25=$375).

This is a very useful tool for making decisions around how much time to spend on proposals, contact, lunches and other prospecting activities.

Bryan Brandenburg has published 5 books as well as a number of articles both in print and on the internet. He has published almost 30 software programs both for consumers and business. More information can be found at www.vmmg.net.

b.brandenburg@vmmg.net