Your greatest business asset is not your concept, your marketing strategy, your funding or even your employees. It’s your customers. Because without them, your company is no more than an unrealized venture. Customers create the need for your offering, enable profitability and, ultimately, keep your organization in business. But not all customers are the same, and one of the keys to financial well-being is understanding which customers are most valuable to your company. In order to accomplish that, you must be able to measure customer worth.
Sure, there are straightforward calculations that can help you determine income minus costs of customer acquisition and output, but there’s definitely more to consider. A customer’s value is weighted on factors that go well beyond how much they pay you for a product or service. Following is a breakdown of the quantitative and qualitative metrics that determine the value of individual customers.
1. The Economic Angle
This first aspect is the most tangible and calculable one. You should start your assessment of customer worth by examining your gross margins and CAC (customer acquisition cost).
Gross Margins: Your gross margins are a reflection of how much money you’re earning from customers after paying the costs to service those customers, or COGS (cost of goods sold). The higher your gross margins are, the more capital you have available to spend on other areas of your business and the better your financial outlook will be. Calculate your gross margins via the following equation:
(Revenue – COGS) ÷ Revenue = Gross margin
CAC: For businesses to thrive, they must invest in the pursuit of new customers, including expenses like sales team salaries, travel needs, conference exhibition and/or attendance, marketing strategies and deliverables, and website production and maintenance. Your customer acquisition cost is the amount you spend on these necessary efforts, and it can be calculated easily with the following formula:
All sales and marketing expenses ÷ Number of new clients = CAC
It’s also important to evaluate how long it takes for your company to recover the CAC you invest in each customer. To do this, you’ll need to apply the gross margin earned from any new monthly recurring revenue a customer is contributing, according to the following equation:
CAC ÷ Average gross margin per customer per month= Months to recover CAC
2. Reference And Referral Potential
References and referrals are golden opportunities for your business’s growth and profitability, which is why this factor is so significant in the value discussion.
New prospects develop trust in your company when they can contact references with similar circumstances who reveal positive outcomes and experiences. Generally speaking, prospects are not inclined to choose your business unless they feel that sense of trust. Therefore, a customer with strong potential to become a reference in the future is more valuable than a comparable customer who does not have favorable potential in this area.
Congruently, customers that refer other prospects to your company are highly advantageous. Referrals are some of the most effective sources of business, and in some cases, their acquisition costs are minimized. A customer who can bring new business directly to your organization — and alleviate some of the expense involved — is a definite asset. Be sure to consider this aspect when examining the overall value of your customers.
3. Contributions To Product Development And Market Insight
Any customer that can help to develop your product, in one way or another, has added value. Beta testers, for example, provide a means for you to refine your offering and work out the kinks without sacrificing your reputation. In some instances, a customer may even be willing to assist in funding your product development if having your company’s solution addresses a major problem for them. In return, they might require exclusivity rights in the vertical or some other consideration.
In addition, some customers afford you the chance to learn something about the market in which your business operates. Therefore, as you seek customers to use your product or service early in its lifecycle, you might consider providing it free of charge, in return for critical customer feedback. These are just some instances in which a customer can provide worth to your organization beyond the typical buyer/seller relationship. These types of customers are highly valuable and should be measured accordingly.
In the end, attracting, engaging and maintaining your customer base requires time and resources. It’s a necessary component of business success, but the expense of it all does impact your profitability. Being able to measure the value of your customers gives you the informed perspective to adjust budget allocations appropriately and focus your efforts on the most profitable relationships.
Do you have additional questions about determining the value of your customers? Our financial experts are ready to help.