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Lifetime Value of CustomersWhile we are discussing economic concepts, let's also discuss the important concept of "lifetime value of customers". People are the most important asset of any company, whether they be the employees, the customers, the reliable suppliers, or the steady-as-she-goes long-term investors. Unfortunately, these "soft" assets don't even get reflected in the balance sheets of the company. Customers can have enormous value to the company, especially if they are loyal customers who will be making additional purchases in the future. Because of that, companies are willing to spend sometimes enormous amounts to get a new customer, even to lose money on the first sale. Is that nuts? Not at all, if there are "backend" products to make second sales, or if the customer will make repeat purchases as book buyers do at Amazon.com. Let's demonstrate with a hypothetical example:
The multiplier will be different for each company depending upon the loyalty and degree of repeat business achieved by the company. The more loyal the customer base, the higher the multiple. For more on this, read "The Loyalty Effect" by by Frederick F. Reichheld (available from Amazon.com) No wonder investors like Amazon.com despite Amazon.com currently losing money. They are accumulating an enormous asset in lifetime customer values - if they can retain the customers.
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