Do you drink much coffee?
I do. I buy on average 2 lattes a day from my local guy.
At $4 a pop that’s $8 a day, BUT I usually get my gorgeous wife Tash a coffee too, so that’s $16… A day!
Add to that the occasional croissant and grilled sandwich and I’m probably worth $100 a week to my local. That’s $5200 a year.
So, how much do you think they should spend to get me as a customer?
Well my friend, that’s why life time value is so important to a business. In fact, it’s the No 1 reason why Costa Coffee has grown from 15 stores in 2002 to 1,900 UK stores by 2016, and they’ve just done their first £1 BILLION in sales!
How on earth does life time value have such a dramatic effect?
Allow me to show you:
First up, let me give you a quick definition of life time value. It’s the average amount of sales and profits a new customer will make for your business over their life time.
So, for my local coffee guy, I’m worth $5200 a year to him. Say I’ll be in this house for 7 years… that’s $35K in sales. Most coffee shops operate on 15% margins so my LTV is $5250 (15% of $35,000).
Make sense?
OK lets move on.
Now Costa Coffee operates on better margins due to their increased purchasing power and better skills in negotiating leases etc.
So Costa Coffee, according to their financial reports, operates on 20% margins.
Let’s assume that each customer on average purchases 1.5 coffees per day (some will do more, others less) so that’s $6 (each coffee is $4).
Lets further assume each customer returns 4 per week (some will go every day, others twice per week).
Which gives us an average visitor value of (4 x $6) $24 per week or $1248 per year.
Costa Coffee has said that its customers are very loyal with each anticipated to stay for 20 years!
So let’s factor that in:
$1248 x 20 = $24,960.00
Let’s factor in our profit of 20% = $4992
Now already you can see that every new customer Costa Coffee gets is worth $4992 to the business. Here’s an interesting question… How much should you spend on marketing to new customers given you know each new customer is worth $4992?
Up to $4991!
But seriously, I know that for most businesses that’s just not possible. as cash flow forbids it.
BUT…
If you’re smart, you borrow money against the future value of those customers so you can use it to find the customers.
In effect, you borrow money to make the money.
This is ONLY smart when you know your LTV.
But this little secret has enabled Costa Coffee to grow and grow and grow.
Make sure you know your customers LTV so you can out-market your competitors.
Neil
P.S Want us to help you grow your business? Then check out our services page