Do you drink coffee?
I love it, espresso specifically. It is the hints of citrus and tang that roll down the back of my mouth that makes me feel like I’m drinking a caffeinated version of a Napa Cab in the morning. And probably like you, I have a shop I go to near my house that does a great job with their coffee. Each morning after kissing the fam goodbye, I stop by Kuppa Joy Coffee Shop in Clovis. The baristas say “hi,” they ring me up for my “usual,” and I get to pause for just a few minutes and enjoy espresso before starting my work day. It’s outstanding.
Now let me ask you, how much do you think my espresso order is worth to Kuppa Joy?
My coffee order is simple and not too expensive. It’s $3. So my order is worth $3, right?
Not exactly. What if I told you that this is only part of the picture? What if I told you that my $3 espresso is actually worth thousands to Kuppa Joy, and that your customers are worth just as much if not more? Ladies and gentlemen, this is the magic of something called Customer Lifetime Value (CLV).
I’ll walk you through a couple of examples of how to calculate it and what it can mean to you as a small business owner.
Customer Lifetime Value is a fancy term for a simple question: how much will someone spend at your business over their lifetime?
If customers on average makes your business $3 net profit each time they come in, and because of the outstanding service and local community, they add it to their morning routine over the next 5 years, that means they come in at least 500 times throughout the lifetime of your business.
That means each customer you bring in has a Customer Lifetime Value (CLV) of $3 x 500 = $1,500.
Creative Agency Example.
Or let’s shift gears a bit and say you have a creative agency that develops websites or apps for customers. On average, each project brings in $10,000 net profit. However, you do such an amazing job that they never end with just one project. They come back for updates and small projects, too. Each of these small projects earns on average $2,000 and in total throughout their life they will have 20 small projects.
That means their Customer Lifetime Value (CLV) is $10k (initial project) + $2k x 20 (the small projects) = 10,000+ 40,000 = $50,000.
Each customer on average is worth $50,000!
Customer Lifetime Value (CLV) in Use
There is a tendency to see each customer as equal to the size of the purchase they make. A person purchasing a $200 purse can seem more valuable than someone picking up a $4 hair clip.
But that’s not the whole story.
When you build a business, you are also building a community and relationships.
And armed with the knowledge of CLV, nurturing relationships is more valuable than any new product line or ad campaign you could possibly run. That person who bought the purse is just as valuable as the hair clip, the key is to treat everyone with the value they have over their lifetime, not in that moment.
So what do you do with this new perspective of your customers?
The most immediate thing you can do with a CLV perspective is change how you view the customer experience. Deep down, it might feel right to go above and beyond for customers, but now you have science to prove it. So, remember names, remake a drink if it’s wrong, if a customer can’t make up their mind between two candles throw them both in. Basically, if there is any way you can help them feel how valuable they really are…do it.
The Dark Side of CLV
The other thing that you need to do with CLV is understand how being out of stock of an item can severely damage your business.
Etsy Shop Example.
Let’s say you have an Etsy shop where you sell glassware with funny quotes on them. After a few months you calculate your current CLV and people are buying 5 glasses throughout their lifetime with your company, that comes out to a total CLV of $70! It is growing each week and you are doing your best to keep all of your designs in stock, but it is proving to be a challenge. Your most popular glass is a wine glass with a complex math equation on it that says:
“If you can solve this you should have another.”
After a new season of The Big Bang Theory comes out, you sell out! That means, if a customer comes to your store expecting to buy a glass for the first, second, or third time, they have to leave empty handed. This is unfortunate, because this experience makes it hard for them to trust that you will have what they want when they want it. In turn, they don’t come back.
How much did this “out of stock” cost you?
Now, let’s say that this “out of stock” turned over 100 first time customers away, preventing them from returning. If your CLV is $70 and you turned away 100 customers, you lost a total of 70 x 100 or in other words, you lost $7000 from a single “out of stock.”
This is key for those who are growing their businesses and trying desperately to keep items in stock. Sure my example might be a bit extreme, and that person may have just purchased another similar product from your store, however, if inventory is not managed you can destroy any momentum you have built.
What did we learn?
One: I love espresso.
Also, a customer is worth far more than their one-time purchase. They have a lifetime value that can be worth hundreds more than a single purchase.
And if a business does not manage their inventory, they could potentially be losing thousands over the customer’s lifetime.
Though CLV seems simple, it has the potential to be extremely valuable if you ever want to grow your business!
But there is help.
I don’t want to leave you feeling that there is more to stress about with your business. This area of inventory management is one thing I focus on with clients. We use simple google doc templates and proven processes to keep any business in stock and on top of the CLV.
If you can identify with any of the examples above and might want to chat…