The “Lifetime Value of a Customer” and “Acquisition Cost of a Customer” are two terms that pop up frequently in marketing discussions. They should be self-explanatory and most marketers understand what they mean.
So it’s surprising that many small and not-so-small businesses do not understand the importance of these key numbers and the importance of knowing the numbers.
I got a reminder of the importance of these numbers last Friday when Sue and I went to town to get our regular Friday night Pizzas.
A bit of background is necessary to show why our Friday night pizzas are important to us. For the 9 years we lived on our farm near the village of Marondera in Zimbabwe, the closest take-away pizza was 100 km (60 miles) away on bad roads. Eating pizza was a rare treat during our infrequent visits to the city.
When we moved to rural Ontario in 2004, we experienced many new and wondrous things. Mail delivery, school bus service and garbage collection for farms were to us, unbelievable luxuries. But the biggest surprise was the abundance and variety of fast food outlets , many with drive-throughs. After sampling many of these we kept gravitating to Tony’s Pizza in our nearest small city, Woodstock.
Since probably the beginning of 2005, we have been spending just under $30 on Pizza every Friday, we may miss a few Fridays in a year but some times we have visitors and spend more. For ease of calculation let’s accept we spend an average of $30 a week for 50 weeks a year.
That comes to $1500 a year or $9000 over the 6 years we have been a customer.
I don’t ever recall seeing any advertising for Tony’s pizza in any media,or ever receiving a direct mail flier, an email or an unsolicited phone call. Why do we continue to support this particular business when there are at least 10 other pizza outlets in our city?
Yes, the pizza is consistently good, better than most. There is a good range of choices, prices are reasonable but not the cheapest in town. We phone our order through and occasionally have to wait a while when we arrive to collect it. The shop is always very clean, well lit and attractive.
But all of that is only part of the experience, the real reason we keep going back is that the people who work there are so nice and good at making us feel appreciated. No matter how busy they are, owners Marc and Anne and all their staff always go out of their way to make us feel welcome. We are greeted by name when we arrive, told about any delay with our order and how long we must wait.
The shop is always busy, we have seen the rare occurrence of a mistake with an order which has then been handled honestly, without excuses, to the customers satisfaction.
Back to the numbers.
This small business has generated sales of $9000 over 6 years from one customer with no advertising spend.
But it gets better due to the magical power of referrals.
Two years ago, a large farming client that frequently supplies up to 60 workers with a light supper mentioned his dissatisfion with his existing pizza supplier. Because we were so impressed with our experience, we recommended Tony’s Pizza to the farm and facilitated an introduction.
I don’t know how much revenue these sales generate, but I would guess it could amount to $1000 each summer over the last 2 years.
To summarise, $11 000 in sales with no acquisition cost and zero on-going advertising costs, and they would have to slip badly to lose our business so future sales are safe.
Sure, this is an example of an traditional brick and mortar offline business, but the lessons and the principles are the same for online businesses. Because of the high cost of PPC and other types of online advertising, the cost of acquiring a customer and the value of that customers repeat sales can be even more critical.
What are your thought on these numbers? Leave your comments in the box below.
Wishing you success in all your endeavours.