The lifetime value of a customer warrants serious thought. Knowing your customer lifetime value can mean the difference between success and failure for your business. Here is how to calculate this important value.
You will be surprised once you find out how much each customer is worth to your business. To find out the lifetime value of the customer you will need to know two pieces of information: One is the average amount of money each customer buys from you while they are with you; two is how long the average customer does business with you.
Once you get these two vital pieces of information, multiply both the values. The product of the two values gives you the lifetime value of the customer.
Now that we know how much each customer is worth to our business, we know how much we can spend to acquire a new customer. For example, if the lifetime value of our customer is $3,650, we know that we can spend up to $3,650 to acquire this customer and still break even. But there is another important insight to this number.
By working to retain the customer, we can actually increase our profitability. It’s also cheaper to use our customer base as a source for new customer referrals. It goes without saying that customers who are happy with our product and/or service are more likely to make referrals. However, we could also introduce incentives to help with our referrals. This method is still cheaper than acquiring a new customer from scratch.
So what is the lifetime value of your customer? If you don’t know, find out. Without this number, you really don’t know the profitability of your business.