Lifetime Value

 

clv2

 

I was working with a client last week and asked her what the lifetime value of  her customers was and discovered that she didn't know how to work that out.  So I thought it might be useful to share here.

The term "customer lifetime value" is how much a customer is worth to you over the lifetime of their relationship with you.

 

Let's first of all define a customer.  A customer is someone you confidently expect will buy again.  Therefore, the value of that customer is not what they spend at the beginning of the relationship – it's how many times you sell to them and how many people they refer to you.

 

This is important to know because it determines how much you can invest in getting a customer.

 

How do you work out the lifetime value?  

Please take a moment to do a couple of quick sums

 

 

A. Average dollar sale per customer :     (e.g.$100)


 

B. Average number of times a customer buys per month: :_____________ (e.g.12)


 

C. Average number of months a customer stays for: :     (e.g.12)


 

D. Multiply AxBxC= earnings from one new customer :     (e.g.$14,400.00)

 

And now multiply your answer from D by the number of new customers per month you think you’ll be getting in your business(e.g.10=$144,000.00) x the number of months you think you’ll be in business (5 years would be 60= $8,640,000.00). I’m confident you’ll find the answer represents a massive reason to find new customers.


 

You can also work out how many other customers this one might refer and repeat the calculation.

 

This understanding of the value of a customer is vital when it comes to lead generation because it essentially tells you how much you can afford to invest (in terms of money or time) to win that customer.

 

You can also apply the same concept to valuing a new lead. If you have enough data to work with, and you know what percentage of your leads turn into paying clients, you can put an approximate value on that lead.

 

Knowing your numbers can also tell you when something is wrong with your business model. If your typical value per customer is so low that you can't realistically use any form of paid advertising then it may well be that you're simply not providing enough value.

 

The value you get from a customer in terms of revenue is dependent on the value you give: how much your services are worth to them.


So even if you're just doing it in theory, it's well worth getting a handle on the value of a customer and the value of a lead to you. It can give you the confidence to increase your marketing spend, or know it is time to review what you're offering.

 

 

 

 

email

Leave a Reply

hybrid_before_comment_form — This function has been removed or replaced by another function.