How to estimate the value? Is it a just simply looking at the cash flow that customer brings in or are there other ways to do it? Of course the easiest and most used method is look directly the income that client brings in, but it is not always the best option. There are many different ways to calculate what the client is worth. Calculating the profit of each customer is the first step to understanding customer value.
Here are some examples of methods that can be used when going little deeper.
Calculate a profit of each customer in current year.
Income of customer minus any costs due of servicing that customer, including cost of goods, cost to service, etc. This could be a bit laborious method especially if there are lot of small customers and no customer-level financials accounting system available. Then this could be done by developing a set of customer segments.
Estimate of how long a customer can be kept
Realistic estimate of active customer relationship is more important fact than the actual timeframe. Also determination of which customers are more loyal and which are likely to be repeat buyers and how often they buy is good thing to know.
Estimate the cost of keeping the customer
Some customers may require large discounts or heavy marketing investments up front, but little or no cost to keep. Others may require a costly reselling effort every month. These cost estimations should do on a yearly basis.
Adding it all together
When calculating all things mentioned above up, it gives a great an overall look of the customer. Most businesses would be surprised by how many of their customers are not as profitable as they looked being. Businesses are also likely to find drastic differences in the value of various customers and segments.
These things are very important factors to businesses when they are looking for ways to grow their business. If they understand their customer value it can help them to:
• Decide which customers to invest more
• Spot a new customers and markets
• Choose which product and service lines should be offered and promoted
• Getting more value by chancing pricing
• Decide which customers to get ”rid of”
• Understand where to cut costs and investments