Powerful Way To Determine And Exploit The Lifetime Value Of Your Customers
The Lifetime Value of a customer is one of the most valuable things you as a business owner can know. It is simply a calculation or determination of how much (in pounds) each of your customers is worth to you.
The reason this calculation is so critical, is that by knowing what the value of an average customer is, you can then determine how much you can afford to spend to acquire a new customer, as well as how much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.
Lifetime Value can be determined a couple of different ways. To get the Gross Lifetime Value you calculate:
• The average purchase amount…
• Multiplied by the average number of times a customer buys per year…
• Multiplied by the average number of the customer continues to buy…
• Plus, the monetary value of their referrals.
This gives you the total worth or Gross Lifetime Value of each customer.
Another way to determine the value of a customer to your business is to compute the Lifetime Profit Value. This differs from the Gross Lifetime Value, in that this computation figures the amount of profit each customer is worth to your business. This is determined in much the same way as above, but with one additional step:
• The average purchase amount…
• Multiplied by the average number of times a customer buys per year…
• Minus product acquisition or production costs, fulfillment and delivery costs, sales commissions, bonuses and salaries, advertising and marketing costs, and other overhead expenses.
• Multiplied by the average number of years the customer continues to buy…
• Plus, the monetary value of their referrals.
This gives you the total profit value of each customer. There’s value in doing both types of calculations for your consulting clients. When initially demonstrating the concept of Lifetime Value it may be easier and quicker to figure Gross Lifetime Value. But when doing calculations for the purpose of developing actual marketing strategies and campaigns, the Lifetime Profit Value will give a more accurate picture.
Finally, the fifth principle to grow your business:- Create Compelling Reasons For Your Customers To Only Do Business With You…
Jeffrey Benson is the owner of Ads Placement Locator, a 3-in-1 revolutionary software which helps locate high adsense traffic sites, ezines for solo ads and other high yielding traffic sources.
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Last edited by Jeffrey Benson; 06-11-2011 at 06:34 AM.
Jeffrey, I agree with what you've put forward here. Anyone who is serious about their business should think in terms of lifetime value for a couple of different reasons:
1) It changes how much you might be willing to spend on customer acquisition. (Higher LTV = higher affordability for lead generation and payout.)
2) It changes how you THINK about each and every customer. A one-off purchase might be worth $100. A LIFETIME value might be $1,000 or more - particularly depending on the value of the product, the possibilities for up-selling, and of course, referrals.
One thing that I also advise people to do is to discount the FUTURE by a certain percentage to reel in the numbers and give them a more realistic perspective. While I can say with 95% confidence that a new customer this year will renew next year, I need to discount the probability as we project out to future years. A schedule might look like this:
Year 1 total customer value = 100%
Year 2 ... = 95%
Year 3 ... = 85%
Year 4 ... = 80%
Year 5 ... = 75%
The newer the business the more you have to discount because you don't have an established track-record from which to form an informed basis for the LTV calculation.
While you are very clear that you use "average" I still like to discount the future. A slightly more conservative approach ensures you don't over-spend while also still allowing for expanded investment in growth and retention.
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