In working with my coaching and consulting clients, my primary focus is getting them to concentrate on working ON their business and not just IN their business.

In that vein, one of the concepts I drill down on is the importance of focusing on customer lifetime value (CLV), which many have found to be the single most important metric for managing their enterprise strategically.

Why? Because knowing, monitoring and constantly tweaking your CLV is key to truly building a business, rather than an expensive, time-consuming hobby.

Honing in on CLV gives a business leader clarity on the return on investment (ROI) of every customer relationship. That, in turn, helps determine which of those customers are most important to growing the business profitably – and which aren’t.

How to Measure Customer Lifetime Value

To calculate your CLV accurately, you have to to look at several different metrics. These include:

  • Annual revenue per customer
  • Average number of years as a customer
  • Average annual cost per customer
  • Initial cost of customer acquisition (total sales and marketing costs/number of new customers)
  • Average annual net profit margin per customer

Let’s walk through an example using some of the metrics above to calculate a CLV:

Say you own Tammy’s Tax Service, which provides tax preparation services for an average of $500 per customer per year. It costs you $250 in advertising fees to get a new customer, $100 in time and materials to actually prepare a tax return, and $100 dollars per return in indirect overhead expenses, for a total expense of $450 per customer.

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What makes you different from your competitors?

Why should your customers choose your service or product instead of others they could choose?

Why should your customers stay with you when new competitors try to get their business?

If you can’t answer those question simply, succinctly and convincingly, you aren’t likely to succeed in business – at least not for long. The efficient and effective answer to those threshold customer questions is called your unique selling proposition, or USP, and having it down cold is an absolute must.

Simply put, your unique selling proposition is what makes your business different from everyone else in your market. A strong unique selling proposition can help you attract more customers, keep them longer and command higher prices for serving them.

Some examples of powerful USPs:

  • FedEx: “When it absolutely, positively has to be there overnight.”
  • Walmart: “Everyday low prices.”
  • Domino’s: “Hot fresh pizza delivered to your door in 30 minutes or its free.”
  • TOM’S Shoes: “With every pair you purchase, we give a pair of new shoes to a child in need. One for One.”

So, now that we’ve seen some strong unique selling proposition examples, what should you bear in mind when trying to create your own USP? [click to continue…]

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