We all know that one-time customers tend to be more expensive and deliver fewer profits for businesses compared with customers who buy often. Furthermore, those lifetime customers are often effective ambassadors for the business, delivering even more value than just the revenue they provide. However, too few business owners recognise the true value of lifetime customers, so they don’t invest sufficiently in acquiring those customers.
Business owners don’t do nearly enough to differentiate themselves to a point where they can lock in lifetime customers. It’s not enough to provide exceptional quality products and services at the right price. There has to be an X-factor that makes customers come back again and again. This starts with understanding the real cost of acquiring customers and understanding the value of a lifetime customer so that the business owner can determine the appropriate level of investment to acquire those customers.
The cost of customer acquisition includes all of the sales, marketing, and advertising costs that go into attracting a customer to the business, then closing the sale and supplying the product or service. Many businesses look to keep that cost as low as possible as a proportion of revenue generated. However, this is a short-term view that can limit the business’s potential to realise more value from those customers over time.
If the business is constantly attracting first- and only-time customers, the value of those customers will never grow. By contrast, as customers continue to buy products and services from the business, their value will go up. This is because, the longer someone is a customer, the less it costs to sell them new products or services since the business doesn’t have to move them through the entire sales funnel; they’re already at the decision end.
When calculating how much the business should spend to acquire each customer, the business owner should start with the end in mind. This means calculating the potential value of a lifetime customer and using that figure to determine how much the business can realistically spend to acquire that customer.
This creates more scope for aggressive spending up front to get that customer fully on board, including loyalty programs, free items, great promotional offers or a more elaborate sales process. Spending that money upfront then delivering an exceptional customer experience is more likely to lead to lifetime loyalty compared with the standard first- and only-time customer experience.
Business owners should look to spend aggressively to acquire these lifetime customers. The amount spent should still be within their allowable acquisition cost but it shouldn’t be limited by thinking purely about a one-time transaction.
Sacrificing some profit on the first transaction to “buy” a customer is among the very best investments a business can make. Doing this will result in more lifetime customers who deliver more value to the business over time. As acquisition costs go down, customer value will continue to go up, leading to a more profitable business overall.
Andrew Laurie, CEO, entrepreneur and business coach and author of “Thirty Essentials: Strategy”