When I was a consultant at McKinsey working with Fortune 500 companies, and even now when I am running my own company, one metric that I’ve always kept an eye on is customer lifetime value -- that is, the estimated value of a customer relationship, based on the average customer's projected future visits and spend per visit.
Almost every Fortune 500 company, in industries ranging from retail to hospitality to telecom, measures this number, understands what drives it, and has a strategy to maximize it. Small businesses are a different story; most are in the dark. That’s a mistake.
One simple way to calculate customer lifetime value is average monthly spend per customer divided by monthly customer churn rate. For example, if a customer spends $30 per month on your product, but 10 percent of your customer base stops buying your product every month, your customer lifetime value would be $30 divided by 10 percent, or $300. So in this example, if the business could cut churn rate in half to 5 percent, it would double its customer lifetime value. Assuming a stable customer base size, this would also double the overall company value!
But to figure this out, you need to know your monthly customer churn rate. Do you know what percentage of your customers won't come back to your business next month? Most small businesses don't. Some of the best businesses with a huge base of regulars have monthly churn rates of 10 to 15 percent, while some of the worst are over 60 percent. Based on data that my company analyzed from thousands of small businesses in verticals like restaurants, retail, salons and spas and coffee and tea, we estimate that the typical brick-and-mortar business' monthly churn rate is shockingly high - likely in the 40 to 50 percent range, though there is huge variation. Assuming the average spend per visit at these businesses is around $20, the average customer lifetime value of a typical small business is only around $50, but for the businesses with the lowest monthly churn rates, it could be 10 times higher-;or $200. That’s a big difference.
So how can you reduce customer churn and maximize customer lifetime value, which will make your business more profitable for the long-term? Try these three steps.
1. Focus On New Customer Experience
What consistently pushes churn rates higher in every business I have ever studied is the rate of new customer churn. If one of your customers returns to your business a second time, there is a 70 to 80 percent chance they will keep coming back. However, most new customers don’t come back. We have seen that almost 60 percent of customers in verticals like retail and restaurants don’t come back after their first visit. Focus on making your new customers happy, so they keep coming back again and again.
2. Keep in Touch
It’s a real challenge to get your customers to come back again and again if you don’t have any way to keep in touch with them. This is why many small businesses are now investing in digital loyalty platforms, allowing them to collect customer contact info at signup. Then they keep in touch via email or text message or social media and engage. There are solutions now available that are specifically designed for small businesses - they can integrate with your POS system and are easy to implement and use.
3. Give Your Customers a Reason to Come Back
Promotions and loyalty incentives really do work. Recently, I visited a San Francisco brunch spot for the first time. On their receipt, they gave me an offer to come back within two weeks to get 15 percent off. While the food experience alone was probably not enough to get me back in the door within two weeks, the combination of the solid food quality plus the discount was. So I went back in and tried another dish, which I liked even better than the one I tried the first time. Now, this place is going to be one of my regular brunch spots. This restaurant took a step toward maximizing their customers’ lifetime value.