Do you know your Customers Lifetime Value?
You should. Are you aware that it actually costs more to attract a new customer than it does to retain an existing one. How much can you really afford to spend to attract a new customer to your business?
The key to creating an effective and workable budget for marketing is knowing the lifetime value of your customers.
That lifetime value number will help dictate how much you spend in your marketing. Spend too much and you’re losing money in the long run. Spend too little – and you’re missing out on an opportunity to grow your business.
The Following are 5 Simple Steps to Calculate Your Customers Lifetime Value
- First, start with your company’s total revenue in the past year and divide it by the total number of purchases in the same period. The resulting number is your average purchase value.
- Next, take your total number of purchases in the past year and divide it by the number of unique customers who made purchases. The resulting number is your average purchasing frequency rate. (Note: If you make a log of cash sales and don’t request an email, then this number may not be accurate)
- Take your average purchase value and subtract the average purchase frequency rate from it. That gives you the customer value per year.
- Calculate the average number of years a customer continues to buy from you. If you’ve been tracking unique purchases this shouldn’t be difficult. This number is the average customer lifespan.
- Now, multiply the customer value by the average customer lifespan to get the lifetime value of your customer.
The following ids an example using some sample raw numbers:
– $100,000 in annual revenue
– 250 purchases
– 150 unique customers
Your average purchase value would be $400. You would then take that number and divide it by 150 to get your average purchase frequency rate, which is 2.67.
Next, you would subtract your average purchase frequency rate from your average purchase value to get $397.33, your customer value per year. If you keep your customers, on average, for 10 years, your customer lifetime value would be $3,973.30.
That’s a very simple example but it illustrates the point. The business would have a lifetime customer value of nearly $4,000.
How To Use Customer Lifetime Value in Marketing
So, now you know your customer lifetime value – now what?
The short answer is that you’ve got a piece of information that can help you attract more customers and make better use of your marketing budget.
Every customer you have contributes to your company’s success and profitability. Understanding just how much each customer is worth to you can help you do a better job of attracting new customers, increasing their lifetime value, and maximizing your profits.
This may seem complicated but it really isn’t. It’s a matter of tracking your numbers, doing a little simple math and being clear on where you stand. Once you are, you have a better idea of what you need to do in your business.
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