Do you know? If not, then you can’t really have any idea what you’re losing, or gaining for that matter, with your actions.
Start With The Theoretical Rooted In Reality
Let’s break this down by necessary components of information by running through a mock case study so you can go back and calculate the same for your business.
For illustration purposes, let’s go with a consumer goods store that also perhaps sells prescriptions – like a CVS or Walgreens. The marketing team doesn’t have tracking data for the anything past 5 years since that’s when they implemented their rewards program and started linking purchases to people. So instead of using their real data to calculate Lifetime Value, they took another data point that made sense, which was the average length of home ownership from NAR, or 6 years. The average purchase transaction varies widely, but they’ve done some research on purchase history and have been able to create 4 groups: Pharmacy, Personal Care, Over the Counter Wellness, and Other (everything else). They’ve then calculated average prices, as well as average number of purchases of each category per year. This is what the breakdown looks like:
In total, each customer that walked in the door was worth $485 a year, or $2911 over the course of their estimated lifetime. As well, each visit in total averaged an estimated $11 revenue for the company. With an average of 84 customers per hour, the store sees 1512 total customers per day.
The team then had a discussion that really got to the root of the issue:
If our employees had 30 seconds to make a positive impact knowing that they would generate $11 in revenue, would they do it? Conversely, if one of our employees was feeling extra crabby and was rude to three customers during his/her shift who then decide the leave and never come back, do we know that we’re really losing $1455 in revenue?
Think about it for a second – $1455 lost over three interactions that could have been over a pack of gum, a bottle of Vitamin Water, and a notebook.
Back To Reality For A Minute
Here are some key takeaways from the example above:
- Lifetime Value is a hard number to calculate, and it changes all the time. Don’t let your lack of precise numbers prevent you from doing something. Look at the data you have access to and use it. You can always (and should) revise your estimates six months later.
- Using a blanket “average revenue per..” number across all types of transactions is too general for most businesses. Look at the data and find patterns that make sense for you to create your model.
- Ask probing questions that get to the root issue. What are the real implications of this information? What should you be doing with this information now that you have it?
What this company decides to do is of course up to them, and will most likely be very different from what you implement with your business. What remains the same is the process – if you don’t know what you stand to lose with each poor experience, then you have no idea what you should be willing to spend in people, training, and tools to ensure a near 100% win rate.
* I did not go into any detail on calculating Cost of Business variables here, but note my statement that Cost of Business should be factored in when you are calculating acceptable Acquisition and Retention Costs.