Making Business Decisions Without Data is Like Driving With Your Eyes Closed!

Driving with your eyes closed… Dangerous, right?

So is trying to make important business decisions without first understanding your data.

You have your data. You have questions about your business. You just need to be able to unlock that information it holds to help get answers to your questions in order to succeed.

If you are going to target one area first, I highly recommend finding out your Customer Lifetime Value (CLV). With this, you can get your customer lifetime profit to compare to your customer acquisition cost.

A good chunk of your expenses go into marketing to grow you customer base, but are you getting your money back?

Here is how you can find out.

BY BRETT HERMSEN

ACTIONABLE DATA ANALYSIS

You can also find Brett at the National Conference this October 4-6 where he will be speaking at the session

“What Keeps You Up at Night? Your Data has the Answers.”

For more details or to register, visit https://whova.com/web/ usssa_202109/

I like to view this from a yearly perspective so that you can see any major business changes over the past 5+ years to get a good view of trends. Each step (calculation) to get to the end goal of CLV has its own unique piece of information that can provide valuable insight into your business’s average customer. Let’s get started!

AVERAGE PURCHASE SIZE = INVOICE $ / ORDER COUNT

Take your total sales for the year and divide that by the total number of order transactions for the year to get the average purchase size. This tells you how much

your average sale transaction was.

AVERAGE PURCHASE FREQUENCY = ORDER COUNT / TOTAL CUSTOMER

Take your total number of order transactions (same as above) and divide that by the total number of customers you sold to that year (even once) to get the average purchase frequency. This tells

you how often customers paid you for your services.

For example, when you are looking at the entire year, the number 10 would mean your average customer paid you 10 times during the year. If your business model is monthly payments, then this would make sense if you have some customers that have been with you for years but more new customers that have only been paying you for a few months. Or, a big chunk of your average customer takes the summer off?

AVERAGE CUSTOMER VALUE = AVERAGE PURCHASE PRICE X AVERAGE PURCHASE FREQUENCY

Take the average purchase price you calculated above and multiply that by the average purchase frequency you calculated above to determine the average customer value. This tells you the aver-

age sales dollars from each customer during the year for your services.

AVERAGE CUSTOMER LIFESPAN (YEARS) = (LAST SALES TRANSACTION - FIRST SALES TRANSACTION) / 365

For all your active customers, you want to determine how long they have been with you. Some will be a couple days and others will be years. This will tell

you how long your average customer

has been paying for your services. For each customer, determine the number of days they have been a customer with you and divide it by 365 to determine the average number of years a customer has been with you.

CUSTOMER LIFETIME VALUE = AVERAGE CUSTOMER VALUE X AVERAGE CUSTOMER LIFESPAN (YEARS)

Take the average customer value calculated above and multiple it by the average number of years your current customers have been with you to determine the customer lifetime value. This tells you the

average sales dollars each new customer will bring to your business.

CUSTOMER LIFETIME PROFIT = CLV X PROFIT MARGIN

Take your CLV and multiply it by your average profit margin to get customer lifetime profit. This will tell you the total

profit from your average customer.

CUSTOMER ACQUISITION COST = TOTAL MARKETING $ / NEW CUSTOMERS

Take the total dollars spend on marketing for the year and divide it by the total number of new customers for the year.

This tells you the dollars you spent to acquire a new customer.

Now you know.

Obviously, best-case scenario is that your customer lifetime profit is significantly larger than your customer acquisition cost. If not, you need to make changes. Now that you have that information, look for past trends. When you spent more in marketing, did you bring in more new customers? Were you able to maintain or grow the average customers lifespan?

The reality is, the important business questions that can be answered with your data is nearly endless. The only limit?

You.

How much would you like to grow your business?

The next step?

Well, no matter how good your classes and your instructors are, you know you still have students that are getting ‘stuck’. It happens. But when it does, it costs you money.

In which classes are students getting stuck because parents stop finding value and leave?

Email me at brett@actionabledataanalysis.com to discover how to find out.

Brett has a bachelor’s degree in industrial engineering from Milwaukee School of Engineering with 15+ years of business experience leading continuous improvement projects. He enjoys the challenge of taking a big puzzle (raw data) and organizing it into something beautiful (charts & tables) to help business owners see the big picture from different angles.