Did you know that it costs more to attract a new customer than it does to retain an existing one — but how much can you really afford to spend to attract a new customer?
Knowing the lifetime value of your customers is the key to creating a workable budget for marketing. That number should dictate how much you spend. Spend too much and you’re losing money in the long run with no return. Spend too little — and you’re missing out on an opportunity to grow your business.
How to Calculate Your Lifetime Customer Value in 5 Simple Steps
Start with your company’s total revenue in the past year. Divide it by the total number of purchases in the same period. That 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.
Let’s look at an example. Here are the 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
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.
