How Much is a Customer Worth? - Learning Center

How Much is a Customer Worth?

Learning how much a customer’s lifetime value is will help you understand potential income for your custom apparel business.

How Much is a Customer Worth

Your custom apparel business relies on repeat customers as well as referrals. In any business, it costs less to keep an existing customer than it does to acquire new ones. Therefore, regardless of the size of the customer’s order(s) you want to focus on keeping that customer’s loyalty.

In our business of providing supplies to custom apparel businesses, we know that by treating our customers right, they’ll continue to buy supplies from us. As their business grows, so does ours. The same thing goes for your customers. They might buy team jerseys now, but in 3-6 months from now might also need team jackets, or want to do a fundraiser using custom t-shirts.

Don’t focus on the initial order. Figure out what the long-term value of that customer is.

Calculating a customer’s value

When calculating a customer’s value, you do want to take into consideration their initial purchase as it will give you a baseline to calculate their lifetime value. What you want to consider is both the customer cost and the profit. When calculating profit you need to factor in more than just the cost of the supplies – blanks, thread, rhinestones, etc. – but also your wage, cost of electricity, rent, perhaps the lease cost of your machine. This profit margin may vary over time, so you’ll need to make sure you’re updating your numbers for each transaction.

Let’s get into some numbers. The company has 10 employees and each of them needs one shirt for each day of their work work, so one order would be 50 shirts. They tell you they will be making two orders per year (to replace damaged shirts or for new employees). The cost of the shirts for the customer are $25/each and this makes their yearly value $2,500 (1,250 per order x 2).

Next you want to take into consideration the longevity of that customer. How many years do you think you can reasonably keep that customers? If you do a great job with your customer experience, you may be able to keep them for years, but keeping it a little more conservative to start, let’s imagine you can confidently say you’d be able to keep that customer for at least three years. We can now say that the lifetime value of this customer is going to be $7,500 (2,500 x 3).

We mentioned however that you need to take profit into consideration as well. So, taking that $7,500 lifetime value, if you calculate your profit margin to be 50%, this customer’s lifetime profit value for you is $3,750.

Cost of marketing

Oftentimes businesses don’t take this lifetime value into consideration when calculating their marketing costs. This is a problem because you may calculate that you spent $100 in marketing to get this one customer, and their order is $1,250 and your profit is only $525 (1,250 order / 50% profit – $100 marketing). However, that $1,250 order is not the end of the story with that customer. Once you have that customer it will cost you significantly less to keep them.

You can start to see that instead of trying to cut costs on blanks and supplies, over time, you’ll see better returns if you invest in your existing and potential customers. You have the ability to positively affect a customer’s lifetime value.

Referrals

A customer’s value doesn’t just stop with their three year value. You also need to include a referral factor. How likely is that customer going to be to refer other business to you? Do they know a lot of other businesses who could use your custom apparel services? Do they have an outgoing personality and love talking with people? Or are they rather shy and perhaps the order is just for their person use.

We use a scale of 1-5 when considering a person’s referral factor. So let’s say that your customer owns a car maintenance shop, so they get a lot of people in their business every day, and they love talking with their customers, so there’s a higher potential that they may refer you to others. In this instance we give them a referral factor of 2.

How this affects a customer’s value is we take that 2, put a decimal in front of it – 0.2 – and multiply it by that customer’s lifetime value. So, if the customer’s lifetime value is $7,500, multiplied by 0.2, you’ve just added an additional $1,500 to that customer’s lifetime value.

In custom apparel, referrals are really important. It’s all about word of mouth and personal connections. This is why taking into consideration a customer’s referral factor is also important.

Determining a customer’s referral factor

If you’re new to sales, you may not have had to take into consideration referrals before. To help you figure out your customer’s referral factor, let’s take a look at the three different types of people Malcolm Gladwell talks about in The Tipping Point:

  • Connectors
  • Salesmen
  • Mavens

Connectors are the people that know everyone else, or at least seem to. If you’re looking for a mechanic, a photographer, whatever skills/service you need, they know someone. They’ve built a lot of business and personal connections. This type of person is going to know other people and business who need your services. These are the people that you ask directly: “Who do you know that needs custom apparel?” They’re going to be able to link you to other people.

Salesmen tend to want people to buy products and services from the same place that they get their product or service. Why? They believe that product or service to be the best. “If you need a lawn maintenance company, you have to see this guy. He does mine and it’s always great.” If this customer is satisfied with the services you provide him, he will tell other people to go to you as well, and in fact will attempt to sell other people on your business.

Mavens are information specialists. They know a lot about the business marketplace, and what each business is best at. These people can be trickier because they will tell someone “If you want embroidered jackets you should see this guy, but don’t order vinyl print t-shirts from him, go see this other guy.” They know the best business for a product or service, and often the best deal as well.

All three of these types of people are going to have a high referral factor (as in 4’s and 5’s). If you don’t feel your customer fits into one of these categories, don’t worry they can still have a referral factor for you. This just helps you recognize some of your best customers and determine whether it’s worth investing in that customer.

As an example, a customer makes an order from you, but they don’t make any indication that there will be follow-up orders. You may make one or two follow-ups to see if there’s anything else you can help them with, however if you get no response, they’re not worth big investments. They may still be worth it to be on your mailing list, so they’re reminded of your business, but not worth you personally visiting them every few months.

More ways to determine a customer’s value

Asking your customers a few questions when they make their order is the best way to help determine their lifetime value.

  • What are the shirts/jackets/caps for – team, event, etc.?
  • Is the event a one-time thing, or is it annual?
  • Have they ever ordered custom apparel in the past?
  • If they did, were they always ordering from the same company? Why or why not?
  • If the apparel is for a club or charity, what do they do professionally?

Custom apparel for sports teams usually means they’ll need more product in the future. Teams often change every year, kids grow out of their jerseys, etc.

If the event is annual you know approximately when they’ll need shirts again, and so you can be preemptive and give them a call before the next event to make sure they’re ordering from you again.

If a customer has ordered custom apparel in the past, you can find out how long they were with that other business to help you determine how long you’re likely to keep them. The why the left the other shops is important too. If they have no reason, you might not be able to keep them very long, but if the shop closed, or everyone else gave them terrible customer service, you know what you have to do to help keep them.

If the customer is ordering for a club or charity, knowing what they do professionally can help you determine whether their business/company may also need your services as well.

Discounts

Oftentimes you may get a customer asking you for a discount on their order, because the event is for charity, saying that you’ll get great exposure. When this happens, take a moment to look at their lifetime value, to determine whether or not that discount is a good idea. If the referral factor and the lifetime value of that customer is low, or non-existent, then offering them a discount is not going to benefit you in any way. However if that customer is a Connector, Maven, or Salesperson, then taking a drop in profit may very well be worth it.

You can also consider offering the discount on the condition that your business logo and website are on the t-shirts. This ensures that you are getting exposure at the event. If you have a good relationship with the customer, that kind of request will be reasonable, and perhaps even within their expectation.

Summary

Your customers are worth more than their initial order. Calculating their lifetime value is helpful to help you understand the long term potential of a customer as well as the level of effort and attention you should be giving each individual customer. Your customer’s lifetime value and referral factor will change over time. Often, the more they use your services the higher chances of them using your service again and referring business to you. This all comes back to their customer experience. Make sure your customers enjoy doing business with you, and they’ll have a higher lifetime value.