This is so critical that it’s important you master this. The marginal net worth and consequent lifetime value of a customer is the total combined profit you make, over the life of an average customer — including all repeat sales and referrals — less all advertising, marketing, and product or service fulfillment costs.
Let me explain and I am going to use simple round numbers to illustrate the point.
For example, let’s say that the first time your average new client does business with you your commission averages $1000.00.
Next, they refer 1 person to you each year for 5 years and the average transaction value for each of those is also $1,000.
Now you have to figure out how much of that is gross profit to you. Let’s say its 50%. So you (theoretically) will make $3,000 profit on your average client over the next 5 years. Now, these numbers are nice low round numbers for demonstration purposes as I said.
You can plug your own numbers in to figure this out for your business.
How much are you willing to pay to get a client? You could spend up to $3000.00 and still make money over the next 5 years.
I don’t suggest that. But up to $500.00 seems reasonable.
Wouldn’t you invest $500.00 to get $3,000.00 back in 5 years?
But you don’t even have to wait the full 5 years to start getting it back. On the first sale you make money, more than enough to recover the $500.00.
Let’s say that your average client refers at least one other client to you. Now your profit from that client is $6,000.00.
$3,000.00 from the client, and $3,000.00 from the referral.
Referrals are even more profitable than clients received through advertising.
Start calculating the lifetime value of your average client. One of your goals should be to increase this value by getting your clients to refer more often, increasing the average sale, making repeat sales more often.
Here’s the formula:
1. Calculate your average sale and your profit per sale
2. Calculate how much additional profit a customer is worth to you each year by determining how many times he/she will buy or refer someone to you. Please be conservative when estimating these numbers.
3. Determine how long an average customer will patronize your business and how much additional profit is obtained from this.
4. Determine if there are additional add-on profit sales due to cross-selling, joint ventures, etc.
5. Add all of the above figures to determine the Lifetime Value of a Customer.
6. Calculate the exact cost of a new customer by dividing your marketing budget by the total number of customers it produces.
7. Now, calculate the total cost of a prospect in the same way.
8. Next, calculate how many sales you make for each prospect you contact. This is your percentage of prospects who become your customers.
9. Finally, calculate the Lifetime Net Worth of a customer by subtracting the cost to produce or convert the customer from the gross profit you expect to earn from him/her over the lifetime of his/her patronage.
The repeat purchases and referrals are where the big money is at (or can be).
It’s one of the keys to successful marketing. Once a person buys from you, it’s much easier to get him/her to buy again and again and refer you again and again.
It’s less expensive, too, because you don’t have to spend as much money on advertising as you did the first time. You can resell, upsell, and cross-sell all your customers. Reselling is simply selling them the same thing they bought before i.e another home or an investment property. Upselling is getting them to buy a better, more expensive, or more sophisticated product i.e. a second vacation home or upgrading to a larger home. Cross-selling is getting them to buy something else that’s related to the original product. i.e. again, like an investment property or a business.
What are you selling on the back-end right now? What could you be selling? How does this impact the Lifetime Value of your average customer?
I'm sure you already know how important repeat and referral business but until you break the numbers down and know exactly what you stand to make (or lose) by not having a good repeat/referaal system in place, it is simply guesswork and guesswork in the real estate business will almost always cost you a lot of money in the long run.