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American Towman Magazine Presents the Week in TowingDecember 06 - December 12, 2017
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Calculating the Lifetime Value of Customers

1 7cd92By Don G. Archer

Most would agree that the life blood of any business is the ability to quickly and inexpensively acquire new customers. This is especially true in the towing business where customers only need you when they need you.

Studies show it costs between 6-7 times more to gain new customers than to retain existing ones. While it is true that having a steady stream of new customers can have a great impact on your bottom line, knowing how to measure what marketing channels provide the best return on investment and how to increase the lifetime value of each customer can be a little tricky.

To make your marketing work you must weigh cost versus return. For example, if you spend $1,000 per month on radio advertising you need a way to track that investment. This can be done using a dedicated phone number or a special "radio-only" offer. You can then begin to measure what it costs to get customers, which is called your Customer Acquisition Cost, (CAC).

To measure CAC, divide the dollars spent during a specific period of time by the number of new customers generated from your campaign during the same period of time. Let's say that over a six-month period you invested $6,000 and were able to determine that your radio ads generated 300 new customers. Your CAC would then be $20.

To know whether a $20 CAC is a good investment you must first know how much you are profiting from each call. One fast way of doing this is to simply add up all the towing revenue generated throughout the year, subtract your expenses for the year, and then divide that number by the number of tow calls you did for the same period.

Because towing businesses provide a variety of services to a wide range of customers and invoice amounts can vary greatly, the best way to determine profit per tow is to use some sort of towing software that allows you to segment calls into categories (such as motor club calls, cash calls, police calls, etc.) and gives you the ability to apply expenses accordingly.

Here's a formula to use: annual towing business revenue - annual towing business expenses ÷ number of tow calls performed = average profit per tow.

Sample Company: ABC Towing—$1,000,000 Annual Revenue from Towing
Annual Revenue From Towing $1,000,000
(Minus) Annual Towing Expense, Not including radio marketing $600,000
Annual Profit $400,000
(Divided) By Number of Towing Calls Performed 10,000
(Equals) Average Profit Per Tow Call (PPT) $40

Now that ABC Towing knows their average Profit Per Tow (PPT) they can subtract their CAC from the radio ad example above.

Average Profit Per Tow (PPT) $40
(Minus) Radio Ad Campaign (CAC) $20
(Equals) Net Average Profit Per Tow, From Radio Campaign $20

Whereas all ABC Towing's other tows were generating, on average, a $40 profit, due to a $20 CAC the tow calls generated from the radio ad campaign only netted $20 profit. Doesn't look too enticing does it?

Now, let's calculate lifetime value.

Customer lifetime value (CLV) is defined as the projected revenue that a customer will generate over the lifetime of their relationship with your company.

One rough way of estimating average CLV is to look at the amount of times repeat customers have used your services.

For example: If ABC Towing started keeping accurate records five years ago and they have documentation to support that there were 100 repeat customers who used their services an average of six times during that period, then they have a point at which to start. They already know that the average Profit Per Tow (PPT) is $40, so they can assume that the average CLV is $240.

Now that we know that the average profit of gaining a new customer is at minimum $240--then the sting of the cost of customer acquisition doesn't hurt so much.

The next step is customer retention, and we'll tackle that in an ensuing article.

American Towman Field Editor-Midwest Don G. Archer is also a multi-published author, educator and speaker helping others to build and start successful towing businesses around the country at TheTowAcademy.com. Don and his wife, Brenda, formerly owned and operated Broadway Wrecker in Jefferson City, Mo. E-mail him direct at don@thetowacademy.com.
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