Pretty much every point-of-sale system tracks and records each customer’s Year To Date dollars spent with you in your dry cleaning shop, and some will go a little further and will include recording all the money a customer has spent with you over the years they have been doing business with you. Both metrics are very important when it comes to sorting customers and determining how each contributes to your business.
Every customer you do business with is important and should be treated with respect and appreciation. But, when you look at your customers and their spending with you, you will notice that while all customers are created equal, the amount each customer spends with you is different. Some customers spend more than others, some customers spend a lot, some spend very little and some spend sporadically (in some cases, some customers make one purchase every five years).
Year To Date dollars is simply how much a customer spends with you within a calendar year. Simply put, it’s a sum of all purchases made between opening of business from the morning of January 1st to close of business in the evening of December 31st.
When you sort your customer list by Year To Date dollars, you will see there are some customers who have spent nothing at all during the past year. This could be because they moved away, died, quit you for another cleaner, or simply didn’t have need of your services therefore didn’t spend any money with you.
Then at the opposite end of the list are customers who may have spent five hundred, a thousand, two thousand, even ten thousand dollars or more with you. Yes, there are customers who spend a lot annually, we love those customers, don’t we?
And then there are all the customers in between. The Year To Date dollars spent can be quite the range, zero to 10,000 plus.
Sorting customers by Year To Date dollars is an interesting exercise as it gives you some indication of who your good and really good customers are, based on annual expenditure with you. So, keeping track of Year To Date dollars spent is a critical KPI to check on occasionally if only to give you an idea of your customers, your good customers and your great customers and their spending levels. Seeing where and at what levels your customer’s annual expenditure breaks down can tell you a lot about your customer base and your market. It becomes very helpful when you want to go out prospecting in the marketplace for more customers and new customers. Knowing what kind of customers and range of spending can be very beneficial in establishing a budget to spend advertising to attract a certain kind of customer.
Sorting customers by Year To Date dollars is an interesting exercise as it gives you some indication of where most of your business comes from. You might be very surprised to discover that you get 80 percent of your business and gross annual sales from just 20 percent of your customers. Yes, that’s right, it’s called the 80/20 rule or the Pareto Principle, as discovered by Vilfredo Pareto.
So, let’s test Pareto’s principle, take your annual sales and determine what 80 percent is. Then, take your customer list, look at how many customers you have in your list, and determine 20 percent of your customer list count. Sort your customers by Year To Date dollars and then scroll down the list calculating the sum of the annual expenditure Year To Date. How close do your customers and their spending line up to the 80/20 rule? And, just for fun, what is the annual expenditure of the last customer in the top 20 percent big spenders list? I’m going to stick my neck out and predict that number is somewhere between 65 and 80 dollars (please feel free to dispute my prediction in the comments area below this article online, email me, or phone me if yours is different).
CLV is Customer Lifetime Value, or in simple terms, it’s the amount of money a customer has spent with you over the entire time (lifetime) that the customer has been doing business with you. Some customers might be new to you with only a few weeks or months since they started doing business with you, while other customers may have been doing business with you for a few years, maybe a decade. I know a 5th generation drycleaner who has grandchildren of customers who were customers of his grandfather who started the business over 100 years ago, how is THAT for a customer lifetime value?!!!
Customer Lifetime Value is a critical metric because it gives a long-term view and a better value to a customer that is loyal and long term and can highlight the difference in value a customer has over longer time frames than just one year’s sales.
If you want to build a long term viable, stable business, you should not just be looking at and measuring customers by YTD dollars, but focus on Customer Lifetime Value.
Customers and their spending vary, as the exercise of sorting customers demonstrates. But adding on another key attribute to a customer valuation can change one’s perspective dramatically. Simply adding customer start date or adding the date your customer first became a customer of yours will show you your customer base in a whole different light. In this article, I mentioned a drycleaner I know that has taken over the family business. His family has owned the business for over 100 years, and yes, there are grandchildren of his customers doing business with him today that were customers of his grandfather that started the business. That just boggles the mind to think of families within a community doing business with each other through generations for over 100 years. It just blows my mind thinking of every new customer that starts with this cleaner is not just getting their clothes cleaned, but are becoming the latest participants in a tradition, becoming part of a legacy that appears to be well on its way in another century. So let’s take a look at a longer term view and why CLV is important and different than just YTD dollars alone
A tale of two customers with YTD dollars and CLV applied. In one of my presentations, I give an example of two customers. Customer ‘A” brings in 4 orders a year, a seasonal customer, getting suits and seasonal wear cleaned to store away or to prepare for wear for the upcoming season. Customer ‘A’ averages $75.00 per order and has been coming in 4 times a year for the past five years since she became a customer. Customer ‘B’ comes in with a small smoke restoration order of $700.00 from a small apartment kitchen fire damaging sweaters, suits and dresses. It’s the only order that customer has ever brought in and that was ten months ago. Which customer is more valuable?
Well, if the only metric you were looking at was YTD dollars, Customer ‘B’ spent more money in the year.
But, when you factor in the previous years of spending, or the customer’s lifetime value of previous purchases from previous years, 4 times a year times $5.00 times 5 years, for a total of: $1,500. Customer ‘A’, despite having more but smaller orders over a longer period of time is more valuable as a customer than Customer ‘B’.
Plus, what are the odds Customer ‘B’ is going to have another fire this year, or next? The odds of Customer ‘A’ coming in again in the spring, the summer, the fall, are pretty good….
As we can see, sometimes taking a longer view can change our perceptions and values. Looking over time, even infrequent customers can reveal a different valuation to our companies. A customer that brings in one pair of pants once a year, and has done so every year for 16 years, while certainly a small low value customer, if that is their entire dry cleaning need and they never go to another cleaner with their once a year one pair of pants order, we own 100 percent of their dry cleaning allocation and they are spending it entirely with us! We should be honored, even if it’s just one order, one pair of pants.
Even infrequent customer can be picked up in a CLV valuation. Covid is an excellent example. Customers were working, both husband and wife had decent jobs and a need for dry cleaning every other week. Covid hits, and one spouse loses their job, and dry cleaning need gets cut in half. The other spouse suddenly has to work from home, reducing dry cleaning needs down to zero. For two years, this continues. If you are valuing the customer based solely on YTD dollars, you would be documenting the reduction in customer sales down to zero. Plus, these two customers drop down to complete zero, and off your report entirely because they didn’t spend anything in a one year period, okay, two. But, with CLV, they still are valued for their previous purchases over the previous years. Now that we have begun to live with Covid, people are getting back to work, returning to offices again, our two people suddenly have need of dry cleaning again, and we can anticipate their visits and sales to resume, which using CLV values will never have recorded them as ‘lost’, and return them back to active customers again.
YTD dollars and CLV, both useful, but in different ways. More to come in future articles.
Darcy Moen opened his first drycleaning shop at the age nineteen. Over the next sixteen years, he built his first 600 square foot plant into a chain of 5 stores, creating and testing his own marketing programs along the way. Darcy is a multi-media marketer, working in digital signage, video, print, direct mail, web, e-mail and is a social media expert certified by Facebook for Pages, Insights and Ad Systems. Please visit www.drycleanersuniversity.com.