Loading What is the Lifetime Value of a Customer and Why is it So Important?
Most people do not know the average lifetime value of a customer in their business.
What is the lifetime value?
It is pretty simple. You simply take the transaction size ($20) and multiply it by the number of times they purchase a year on average (3) times the number of years they average as a customer (5) and you have the lifetime value. In other words:
Average Transaction Amount X Average # of Transactions
X Average # of Years as a Customer= Lifetime Value of a Customer
For this scenario we would have a lifetime value of $300 dollars. That is three transactions of $20 for 5 years.
3 x 20 = $60 a year
$60 a year x 5 years = $300
That is HOW you get the lifetime value.
Now lets look at why it is so important to you. The reason is because now you know how much you can afford to spend. It gives you the ability to out market your competitors.
Here’s another reason why it is so valuable. If you run a marketing campaign and you acquire customers you may “lose” money on the first transaction, but on the second and follow-up transactions you make money.
The key is in making sure that if you are marketing to customers on a cold list (a list of people you do not have a relationship with) that you capture their contact information after they do one transaction with you, so you can continue to market to them again and again.
Here’s an example. Let’s say you have a local pizza shop. You spend $300 getting customers to come in. The total money that comes in is $200. We’ll say that 10 people each spent $20. So, you technically “lost” $100 on the first sale.
However, if you get those people to come in again, and each customer is worth $500 over the lifetime value, you actually made $5,000. Granted, I am not taking into account the cost of the pizza and other expenses, but the important thing to remember is the concept here.
Rarely, unless you are in higher transaction businesses, will you break even on the “front end.” You will make your profit on the second transaction and then on further transactions.
This concept is so utterly important and yet few people get it. I highly recommend you understand the lifetime value so that you can truly setup a system to acquire customers on a long base.