Do you know the numbers you need to calculate your customer lifetime value?
No. That’s quite alright.
After this conversation you will be crystal clear on how to do that.
So, who is this blog post for?
It is for you the small business owner who either:
- Has no clue what customer lifetime value is or
- Does not understand the math behind it, let alone calculate it.
So read on as we’re going to educate you on how to calculate customer lifetime value and the math that goes with it.
What is customer lifetime value?
Per Wikipedia customer lifetime value (CLV) or (CLTV), or lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.
Also, according to Wikipedia customer lifetime value can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.
In essence, how much potential profit can that 1 customer bring to your business as long as they remain a customer based on present day projection of future cash flow.
That can be months, years, or decades even.
It all depends on your business.
Make sense so far?
Are you ready to learn what the simple formula is for calculating customer lifetime value?
The formula used to calculate customer lifetime value
Just to be clear, I did not draw this formula up in the dirt like you’re playing sandlot football. It comes directly from a reputable source Entrepreneur, Brad Sugars, August 2012 and now we’ll go over each part of this formula.
Okay with you?
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
So, let’s walk through an example shall we.
Here are your numbers for this example.
- Average Value of a Sale – $100
- Number of Repeat Transactions – 5 transactions
- Average Retention Time for a Typical Customer – 12 months
All that’s left to do is plug these numbers into the formula above.
$100 x 5 x 12 = $6,000
Each customer has a lifetime value of $6,000.
Piece of cake.
Wouldn’t you say?
After going through this exercise can you tell me your lifetime customer value right now?
If not, you better sharpen your pencil and figure it out right now.
So, you’ve figured out your customer lifetime value and now what do you do with this information?
You can start to work backwards?
What do you mean by that?
You can make a decision as to how much you want to spend to acquire that customer.
How much should you spend on customer acquisition cost(s) if your customer’s lifetime value is $6,000?
There’s no right or wrong answer here.
Choice is yours.
How much profit do you want to make?
Would you spend $500, $1,000 to acquire a customer if your customer lifetime value is $6,000.
Ah yeah. That’s a no-brainer!
While we’re talking about calculating customer acquisition cost you should do yourself a favor and read this blog post written just yesterday. It contains some valuable information that you’ll find useful. Go see for yourself.
Recommended Reading: How Do You Calculate Customer Acquisition Cost To Maximize ROI
Why don’t we touch on some different types of
customer acquisition marketing strategies you can use in your business
We’ve already established based on your customer lifetime value ($6,000 in case it had escaped you) that you have a decent chunk to devote to customer acquisition while maintaining your profitability.
So, what is a good use of your resources?
Per dollar spent content marketing generates 3 times as many leads as traditional marketing according to Demand Metric.
Content marketing is a great way to go as it will allow you to maximize your return-on-investment.
As you know content marketing is time-consuming, but as you’re aware it is well worth it as we just mentioned.
Instead of producing all of the content yourself, you can outsource some of it and still reap the benefits of your content marketing efforts.
Where can you go for outsourcing as it relates to your content needs?
By outsourcing some of your content needs, it can free you up to work on other customer acquisition channels.
What channels are you talking about?
You can attend networking events at your local chamber of commerce, networking group via Meetup, or attend your local small business association.
Yesterday I wrote a blog post that goes into networking both online and offline as customer acquisition strategies that will improve your bottom line. Go read it right now. It’s worth a few minutes of your time.
Recommended Reading: Types of Customer Acquisition Strategies That Will Improve Profitability
So, there you have it.
The math used to calculate customer lifetime value.
What are your thoughts?
Do you have a customer acquisition process in place for your business?
Is that process working?
Is that process efficient?
Is that process cost-effective for your business?
If you could improve that process would you?
Do you need help in figuring out which parts of your process should stay or go?
If you’re answering “Yes” to all of these questions then my hats off to you. Business must be awesome!
Otherwise you and I should talk. Let’s see how I can get you to where you want to be.