Marketing Math: What's a New Customer Really Worth?
It’s strange, but many small-business people have no idea what a good regular customer is worth to their business. By calculating that figure, you should gain a better idea of what you’re willing to invest or risk to attract a good, regular customer. The calculation will also tell you how important it is to keep your existing customers happy. The cost of retaining a customer and even expanding a customer’s value is much less then getting a new customer.
To determine what you’re willing to invest in marketing, first discover what an average new customer is worth to you. To determine their value, answer the following questions:
1. What is your average sale (transaction amount)?
2. What is the frequency of your average customer? This calculation can be expressed in transactions or visits per week, month or year, depending on the type of operation you run.
3. What percentage of new customers become average regular customers? We call this the “conversion ratio.” This will undoubtedly vary depending on how that new customer was generated. For example, someone buying for the first time using an aggressively priced coupon would less likely be a repeat customer than one who bought based on a personal recommendation of a friend. To be more accurate, you may want to calculate this information based on several different criteria and then take an average.
4. What is the average life cycle of a new customer? Once you get a customer, how long will that customer continue to buy from you before he or she moves, gets mad, or no longer has a need for your product or service? This length of time can generally be expressed in months or years. It may be a more difficult number to get, but do your best.
5. How many new customers are referred to you by your existing customers? When you gather information about a new customer, ask how they found out about you. One possible answer is “referred by a friend.”
How to Determine the Value of a New Regular Customer
In order to figure out how much in gross sales a new regular customer brings you in a year, you need to define what a regular customer is. Through a careful audit you can determine this information. Obviously, “regulars” can range from several times a week or several times a year. So, set those criteria. For example, a typical fast, casual food operation may set that number at three or four times a month, while a more upscale operation may set it at three or four times a year.
Then you simply multiply that average regular frequency number by your average check. We use the average check, not the average guest, because for local store marketing (LSM) it will be a more accurate number, in that you have one person who influences the dining decision. For the purposes of illustration, let’s say that we have determined that your average regular frequency is once a week with an average check of $10. By simply multiplying 52 weeks by $10, we then have calculated that the value of a new regular customer is $520 annually. As simple as it sounds, many operators don’t bother to figure this out, which means they’re flying blind.
What’s Your Targeted Increase?
Simple question, but let’s break it down. Let’s say our sample unit does $1,000,000 in annual sales. The goal for the year is to show an increase of 5 percent in gross sales, $50,000 in additional sales attributable to LSM is needed.
Now, How Many New Regulars Do You Need to Hit Your Sales Target?
Divide the sales goal of $50,000 by the value of a new regular customer ($520). The answer is 96.1. You need 96.1 new regular customers to generate $50,000 in additional sales.
What’s Your Conversion Ratio?
There’s just one more important piece of the LSM puzzle now. How many first-time buyers does it take to generate one new regular customer? In our experience, it ranges from as low as 12 percent to around 25 percent, though it can be as high as 50 percent for newer locations with super operations. The point is you should not guess. Your research tells you with certainty what you have to work with so you have no illusions of what it’s going to take to make your sales numbers. Let’s say you determine that you get a 25percent conversion ratio. You know you need 193 new regulars to hit your goals. Therefore you need four times as many “first-time buyers” to end up with 193 regulars.
Simply put, by bringing in 772 first-time buyers (under the right circumstances), you are very likely to end up with 193 new regular customers. Those 193 will generate an additional $50,000 in this year and another $50,000 in the following year. So your goal will be attract between 64 and 65 first-timers each month on average.
Related: Three Steps to Effective Sales Promotions