Ultimate guide: Determining what is a customer worth
Some businesses are valued by sales, others valued by traffic, some may be by assets and even intellectual property. But for independent business owners, for example, route-based businesses, their bread and butter are their customers. Yes, I 100% agree that all customers should be treated equally - I am with you on that. But are all customers worth equal when it comes time to sell your business?
Maybe not! You see, you may have that big fish, aka a big account, that your business services on a daily or weekly basis and buys or uses your service or product. Losing that customer will take a big hit on your business. I had a friend who owned a distribution business, and 70% of his gross sales were made up of just 4 customers, while the other 30% was 35 customers. So, to make my point, each customer holds a value when it's time to value your business. In this article, we will break down some key points to take into consideration when valuing what a customer is worth.
"Customer service shouldn't just be a department, it should be the entire company." — Tony Hsieh
Why is it important for businesses to determine the worth of their customers?
In any business, whether it's small or large, new or established, the thought of selling it for a substantial profit is often in the back of every owner's mind. While building a business is primarily about making a profit, it's important to remember that growing your customer base is a fundamental aspect, especially for independent business owners operating out of a single vehicle or truck.
For instance, if you are trying to sell an EV charging station business, your valuation considerations go beyond just sales and net profit. You also need to factor in your customers and assets, such as the electric charging machines. On the other hand, for businesses like grease trap cleaning companies, your most significant asset could be your customer base. This is because, in this scenario, a truck is readily available for sale to anyone. In contrast, your customers who rely on your services for grease trap cleaning, with varying service agreements like three-month or bi-weekly contracts, cannot be valued in the same way. Therefore, understanding the worth of each customer becomes crucial in determining the overall value of your business.
What is the simplest way to value a customer’s worth?
The simplest way to determine a customer's worth is by calculating their lifetime value (LTV). LTV is the total revenue you expect to earn from a customer throughout their engagement with your business, minus the costs associated with serving them. Here's an example using a bread delivery business and how to do it :
Example: Bread Delivery Service with Customers Spending $500 Weekly and Costs
Assuming each customer spends $500 per week, but you have costs of goods and expenses that amount to 40% of the revenue:
Average Weekly Spend: $500
Costs and Expenses as a Percentage: 40% (0.40)
Now, let's calculate the customer's contribution margin:
Contribution Margin per Customer = (Average Weekly Spend - Costs and Expenses) x Weeks in a Year x Customer Lifespan
Contribution Margin per Customer = ($500 - ($500 x 0.40)) x 52 (weeks in a year) x 5 (years)
Contribution Margin per Customer = ($500 - $200) x 52 x 5
Contribution Margin per Customer = $300 x 52 x 5
Contribution Margin per Customer = $780,000
In this adjusted example, each customer who spends $500 per week on your bread delivery service, while considering costs and expenses, is estimated to have a contribution margin of $780,000 over their 5-year engagement. This represents the individual value or worth of a customer to your business, accounting for costs and expenses.
*LTV stands for "Lifetime Value*
How to grow your customer value?
To grow your customer value, focus on creating exceptional experiences. Listen to your customers and tailor your offerings to their needs, making them feel valued and understood. Encourage loyalty with rewards and perks through loyalty programs. Identify opportunities to upsell or cross-sell relevant products or services to boost their spending. Prioritize customer retention by resolving issues promptly and keeping customers engaged. Leverage data to understand their preferences and deliver personalized marketing. Consider subscription models for recurring revenue. Referral programs can bring in new customers through word-of-mouth. Continuously improve your products and services based on customer feedback. Keep your pricing competitive and regularly review it. Collaborate with partners to expand your reach, and most importantly try to win back any customers you lost These efforts will not only grow your customer value but also foster lasting relationships and business success.
In wrapping up, the significance of knowing the value of each customer cannot be overstated, whether you're running a small local business or a sprawling corporation. It's not merely about numbers; it's about shaping your business strategy for long-term prosperity. By crafting remarkable customer experiences, fostering loyalty through tailored programs, and utilizing data-driven insights, you can amplify the worth of every customer
Now, when it comes to selling your business, this knowledge becomes a pivotal asset. Potential buyers aren't just interested in financial figures; they want assurance that your customer base is robust and brimming with potential. Understanding the unique worth of each customer bolsters this assurance, showcasing the loyalty and growth potential your business holds. It's not just about sealing a deal; it's about securing a lucrative and prosperous future both for you and the fortunate new owner of your business. So, remember, in the world of business, the value of every customer can truly make all the difference.
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