Every year I meet dozens of business owners looking for help with their marketing. Honestly, most of them don’t know where to begin. Social Media? SEO? Really, the options are endless. I typically start off by asking them four very important questions. One of these questions is pretty straight forward. What is your business’ Lifetime Customer Value?
In most cases, the stare at me blankly, wondering why I would ask such a question. Many don’t even know how to calculate the value of a customer or what the average customer is worth in regards to dollars in the bank account. In today’s post, I’ll be sharing about Lifetime Customer Value and WHY YOU SHOULD KNOW YOUR NUMBER. While it isn’t something I hear businesses talk about often, it is a key component in measuring your marketing and how well you follow up with your customers.
How to configure your Lifetime Customer Value
Yes, you can read about a highly technical method from Harvard Business School about how to calculate this value here, but today I’ll be sharing a simple method to figuring out your lifetime customer values. Because most businesses have some history to them and often times customers will buy more than one product, it is fairly easy to come up with a lifetime customer value for your business. Here is the basic calculation.
Total amount of revenues divided by total amount of unique customers = Lifetime Customer Value.
It is important to remember that this simple division should be done over several billing cycles. For example, some businesses will have to calculate back over several years if their customers buy only from them yearly. So that would be three years of revenues divided by three years of total customers. To get the most accurate lifetime customer value, a company should use as many years as possible. A company may also want to segment departments as well if they are marketed differently. For example a pool builder might segment his service clients from his new construction.
Let’s look at some examples:
Let’s take a simple service based accounting firm that has been in business for 2 years. $450,000.00 in Revenues over 2 years divided by 237 clients = $1898.73 average lifetime customer value.
Real Estate Agent
Take a Realtor who’s been in business for 8 years. She has made $1,288,000 in commissions from 89 customers. Her lifetime customer value would be $14,471.91 per customer on average.
Why you should care about Lifetime Customer Value
Reason 1 – ROI Tracking
Really, there are two reasons why you should be watching your lifetime customer values. First of all, if you are spending money on marketing and trying to acquire new clients or customers, you need to know how much money you should spend to gain that customer. For example, in my marketing business, my average lifetime customer value is well over $30,000.00. So if I were to do marketing to gain clients, I would remember that every new client is worth about $30K in revenues to my company. Knowing what a customer is worth on average allows you to actually spend more money on marketing that a traditional ROI sheet might tell you.
For example, if a company spends $100.00 to get a new customer who buys $100.00 worth of products, they might feel discouraged. Remember, they spent $100.00 and received in return $100.00 in sales. Chances are good that they lost money because the cost of doing business and their margins on the service or product. If you look at traditional ROI, you might say this is a loosing deal. However, if that customer on average will buy 12 more times from the company over his lifetime, the ROI changes dramatically.
Now the company is spending $100.00 to get $1200.00 in revenues and is probably making a profit.
Reason 2 – Measuring Marketing Automation
The second reason why a company should measure their lifetime customer value, is to see how effective their follow up is. Most companies I meet with for the first time aren’t following up with customers! When companies like this start following up with customers and asking for future business, they typically see a dramatic increase in the average lifetime customer value.
For example, a couple of years ago I had a client who didn’t follow up with any of his customers who purchased from him. The average lifetime customer value was around $225.00. After a full year of doing follow-up marketing, (Four Step Marketing – Step Four) he had increased that to almost $300.00 per customer and saw a dramatic increase in his revenues because he had never followed up with customers before.
So now you know how to figure out your Lifetime Customer Value. Understanding this is a great starting point for figuring how much you can spend to gain new clients or customers.