How Much Should A Contractor Spend To Get A New Customer?

Lifetime Customer Value Contractor Sales & Marketing CGeorge was a poured wall contractor for 35 years.  He owned a successful business without doing very much advertising.  He always had a quarter page spot in the yellow pages and would occasionally run an ad in the local newspaper.

When George retired in 2007, his son, Jason, took over the concrete business.  Soon, Jason’s workload began to steadily decline along with the overall economy.  The old ways of marketing didn’t work to get new business.  In the New Economy, things had changed.

Jason knew that he had to make changes – and quickly – or else he wouldn’t be in business much longer.

Jason needed to determine how to get new customers.  While figuring out what marketing strategies would work for his business, he learned about the importance of calculating what each customer was potentially worth to him.  He also learned how much profit he stood to make on each new customer that he brought into his business.

These numbers told him how much he could afford to invest in marketing to acquire new customers.

How To Determine Your Customer Lifetime Value

When you get a new customer, it is important to recognize their value beyond just that initial sale.  Many new customers, such as general contractors and homebuilders, have the ability to be repeat customers.

These repeat customers have the potential to have a big impact on your construction business for many years to come.  You may have heard this described as lifetime customer value (LCV).  LCV is the total value of a customer over their lifetime.

I believe we should refine LCV into two separate calculations in order to gain a better awareness of the impact new customers can have on our construction businesses.

LCS – Overall Sales

The first calculation is lifetime customer sales (LCS), which is the overall sales amount that a new customer can contribute to your company.

Here’s how to determine LCS:

First, determine the average job/transaction/project sale amount for that customer.  Then, decide how many jobs that customer will do per year.  Lastly, estimate how many years that customer will remain a customer.  Multiply those three figures together to get your LCS.

(Average sale per job) x (Number of jobs per year) x (Average retention in years) = LCS

This number tells you the overall sales impact of that type of customer.  It tells you the sales contribution they could make to your company.

LCP – Overall Profit

Another important number to figure is lifetime customer profit (LCP), which is the overall profit potential of a new customer.  This is important because it tells you how much you can spend to acquire, or buy, that customer.  It also tells you how much money or resources you can allocate to retain your current customers.

To determine LCP:

First, determine the average profit from that job/transaction/project for that customer.  Then, decide how many jobs that customer will do per year.  Lastly, estimate how many years that customer will remain a customer.  Multiply those three figures together to get your LCP.

(Average profit per job) x (Number of jobs per year) x (Average retention in years) = LCP

This number tells you the overall profit from that type of customer.

An LCP Example

Here’s an example of determining LCP.  Jason determined that his net profit from constructing basement foundations for custom homebuilders is $1,500 per foundation.  His custom homebuilders average four homes with basements per year, and they usually stay with Jason for five years.  The equation looks like this:

($1,500 net profit per basement) x (4 basements per year) x (5 year retention) = $30,000 LCP

In this example, you see that Jason’s lifetime customer profit for custom homebuilder customers is $30.000.  Jason can now determine how much he will invest to acquire a new customer like this.

Smart contractors will invest the profit from the first job – $1,500 in this example – to get a new customer.  They do this because they know that the customer will bring them another $28,500 over the course of their lifetime.

The LCP can also guide you in determining how to deal with problem issues that arise with your customers.  If a customer is worth a lot over their lifetime, you may be more willing to accommodate them during a dispute.

So, if you want to gain a better understanding about what a customer is worth to your business, and how much you are willing to invest to get new customers, then go through this process.  You’ll be able to make better, more informed decisions about your business.

Once you know how much you’re willing to invest to get a new customer, head over to my Products Page to learn how to get new customers quickly.

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