Calculate the lifetime value of your customer
When business owners hire me to help turn their business around, one of the first things I do is calculate the lifetime value of their typical customer. This is something that very few business owners ever stop to think about but it’s critical to your success!
The lifetime value of a customer is simply the amount of profit each customer brings to you over the course of their buying lifetime with your business.
Now, I will show you a very simple way to calculate your Customer Lifetime Value (CLV), but unless you keep great records, you’ll want to have a bookkeeper to go through receipts and calculate the exact numbers for your business.
Customer Lifetime Value = Avg yearly customer spend (times) the number of years the avg customer stays with you.
Here’s an over simplified example.
Let’s imagine that your average customer spends $250 every time they buy from you, they do business with you 4 times a year, and once you acquire them, they remain your customer for 5 years.
That gives you a yearly customer value of $1000 ($250 x 4) and a lifetime customer value of $5000!
Now you’ll obviously need to factor in your initial marketing and other expenses, but just knowing an approximate lifetime value can be a huge help in your business!
Keep in mind also that with the positive word of mouth and referrals that just one new customer can generate, that lifetime value could skyrocket, which is why it’s critically important to take exceptional care of both your existing and prospective customers!
One reason why the lifetime value of a customer is so important is because it gives you a general idea of how much you should invest in your marketing efforts to get that customer in the first place.
Using the example above, if you know that each new customer is worth $1,000/year or $5,000 over five years, how much money can you afford to spend to get a new customer or client? Many businesses today can confidently lose money acquiring new customers, and they often don’t make a cent on those first few purchases, because they know that over time the odds are in their favor and they’ll profit in the long run.
Without the knowledge of your customers lifetime value, would you have the confidence it takes to make a sizeable investment in your marketing efforts?