Wilma Mankiller, the first female chief of the Cherokee Nation, once said, “America would be a better place if leaders would do more long-term thinking.”

More long-term thinking could be a good thing for just about any institution or entity, from a nation to the environment, to personal health, investing and business.

In 1981, a young man named Chris Zane borrowed some money from his grandfather to buy a small bicycle shop in Branford, Conn. That year, the shop took in $56,000 in revenue.

Zane’s competitors were larger, more established bike shops with greater buying power and advertising budgets. He couldn’t compete on price, so he had to figure out another way to grow his business. He put pencil to paper, ran some calculations and determined that his average customer could spend about $12,500 on bicycles, repairs and accessories over the course of a lifetime.

Every customer who came into his store, he determined, could be worth an average of $12,500 to his business, according to the book “Reinventing the Wheel: The Science of Creating Lifetime Customers.”

From that point forward, Zane began to run his business and make decisions according to this “Customer Lifetime Value.” He did some things that were considered unorthodox, but they were practices that he thought would cause customers to trust him and return in the future.

He instituted an unlimited return policy. He was told that it would be too risky because customers would abuse it, hurting profits. But Zane knew it would also engender trust, build loyalty and increase his chances of garnering more of the $12,500 value of each customer.

Free lifetime service on any bicycle purchased from his shop was a bad idea, he was told, because he’d sacrifice revenue. But he knew it would keep customers coming into the shop to purchase more bicycles from him, because they knew that they’d save on repairs as long as they owned the bike.

Calculating Customer Lifetime Value (CLV) caused Zane to see and run his business differently. CLV is not a new concept. But so few businesses actually calculate it, and of those who do, fewer act on it.

What are some of the advantages of calculating CLV for your business?

Calculating CLV evokes longer-term thinking; it can lead you to the kind of decisions that can make your business more sustainable.

When you calculate and internalize CLV, you’ll begin to focus on building long-term relationships with customers, instead of generating individual transactions. The relationships that you build will generate the transactions, and do so at a lower expense to the business.

Here’s why: It costs five to 12 times more to generate a sale from a new customer than it does to generate that same sale from an existing customer.

When you focus on building customer relationships instead of generating transactions, a higher percentage of your sales will be from existing customers, so your cost of sales will be less, leading to higher profit margins. The profit that you sacrifice through customer-friendly policies will usually be offset by a lower cost of sales.

And you’ll also sleep better at night, knowing that your customers won’t defect to your competitors in the morning.

A final note on CLV – don’t keep the number a secret. Share the calculation with your employees, especially those who come face-to-face with your customers. Once those employees understand the true value of a customer, they’ll be more likely to engage customers in a way that grows the relationship.

So, if you haven’t calculated the lifetime value of your average customer in a while, do it today, and spend the rest of the week thinking how you might re-focus your business strategies and tactics on maximizing customer value, instead of maximizing transaction value.

By the way, Chris Zane, the owner of the bicycle shop in Connecticut, reported in a podcast recently that he’s on track to achieve $21 million in revenue this year. That’s a 23 percent annual growth rate, from that day in 1981 when he first calculated the Lifetime Value of a single customer, which changed his approach to business.


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