Seth Godin urges businesses to consider the lifetime value of a customer, not just the value from the first sale (or indeed the latest sale).
Go and read it, it makes sense, but bear in mind his argument is based on a particular kind of product or service, one where lifetime value of a customer can be calculated with some value of reliability, and expending what seems like a disproportionate amount on acquisition or retention is a much safer bet.
If you’re serving a specific geographical area there is a limit to the amount of competition for that customer’s business that you face – a customer is by necessity more likely to be loyal. If your product naturally has some lock-in (like a mobile phone contract) then you can work out how much a customer is worth to you very easily. Barriers to entry (by competitors) or exit (for the customer) create an environment with a relatively low churn rate, a predictable level of repeat business and a limited number of other places for a customer to take their spending.
If however you’re an online merchant, selling a product you don’t have an exclusive on, your competition is almost infinite and made up of players with different agendas. Not everyone is motivated by the need to make a profit, their goal may be market share. If Amazon enter your niche, there’s every chance you’ll get wiped out, just as dedicated greengrocers and butchers shut down all over the UK as supermarkets expanded. Calculating that lifetime value has to be tempered with the likelihood that a lower priced competitor will take their business regardless of how much effort you put in.
There are ways for you to fight back against the hegemony of an Amazon or the like. You can use content marketing, show off your expertise and thought leadership, you can cultivate relationships with bloggers to get you links to improve your search engine ranking and boost traffic. Yet there’s nothing to say that a customer won’t just take the advice from you and buy from the other site that’s $2 cheaper. The one thing that’s very hard to justify in that situation is losing money on an order in the hope that you’ll make it up later – if you’ve price-matched or incurred costs to a point you’re not making anything on a customer’s first order, what makes you think you’ll do any better with their next order? Or that they’ll have any loyalty to you anyway?
Take care with those lifetime value calculations and remember you can’t rely on always getting a customer’s business (and referrals) no matter how remarkable you are.
Image credit: Florrie Bassingbourn via Flickr
