Lifetime Value of a Customer
Posted in online marketing on March 20th, 2010 by adminTags: customer acquisition costs, lifetime value of customer, sales funnel
My post here called ‘lifetime value of a customer‘, (aka lifetime customer value or LVC) is the second part of my ‘duh’ series on Internet marketing.
If you haven’t already done so, please read part I, titled, ‘customer acquisition costs‘.
While the method for calculating the ‘lifetime’ customer value is a bit crude, and frankly, the lifetime value can’t be known until either the customer or your business expire, what you can do is get an average value to date of all your customers.
There are probably 101 ways to tweek this calculation, but for simplicity sake, just count up the number of customers you have who’s purchased from you.
If you don’t have this number handy, try perusing your orders table and do a query looking for unique customer IDs and ask it to return a count.
Once you have this number in hand, simply take your gross total sales over the same period (in the numerator), and place your unique customer i.d.’s (who’ve actually purchased from you) in the denominator.
total sales / number of actual customers
I’m not trying to insult anyone’s intelligence here, but by way of example, if you have 100,000USD in sales over a 2 year period and 100 customers, your lifetime customer value is 1000USD — at least to this point.
Since ‘lifetime’ is a relative unknown while the relationship is still alive, some analysts like to look at annual, or two year numbers. You can tweak this 100 ways to sunshine, but I’ll leave that up to you and your individual creativities.
Why is Lifetime Value of a Customer Valuable Information?
The LVC can be paired with the customer acquisition costs to get you some pretty interesting information pretty quickly.
Once you have these two numbers, see if you can subdivide your market by demographics, lead source, salesman, etc.
What you will (usually) find is that one lead source or market is providing you MOST of your ‘bang for the buck’ (so to speak).
Then, you should take some time to further segment your market and look for the areas that are costing you the most and you can focus your energies on those that give you the best return.
Lifetime Value of Customer versus Customer Acquisition Costs
In situations where your LVC is less than your CAC you either need to be able to *realistically* justify continuing to pour money into a broken machine.
There are specific cases where fierce customer loyalty and high switching costs will justify paying more to acquire a customer than can reasonably extracted in a year or two’s time. There are also cases where self liquidating offers are set up to bring customers in the door. However, successfully utilizing such a strategy means that a ‘back end’ sales funnel has been thought out and thoroughly planned for — ahead of time.
In the next part of my series I’ll touch on the sales funnel. Remember, although a lot of the material covered here will feel remedial to many of you, it never hurts to review the fundamentals from time to time to make sure we haven’t misplaced the forest for the trees.
Until next time,
r8r
Lifetime value of a customer is the present value of the future cash flows attributed to the customer relationship. It is used as
a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction.
thank you garden gazebo…i noticed something funky happening with my site on this template…it cuts out all the dofollow links…so for the timebeing, i’m reverting back to my old template.
r8r
Truly, i like your blog theme, it so simple and clean.
Lifetime value of a customer shows what a customer is satisfied by your product and how long customer will use your product.
$100.000 was a high rate that’s in 2 years.
And what would you do if you have gone beyond in providing customers with impressive solutions, on time, in budget, flxible payment options, respect, on time project deliveries, moneyback and all and even then because of the borderline personality disorders he walks away? Would you go ahead and ask him to stay here? Oh Common, there are some idiots who never appreciate with whatever you do, I mean it.
Lol
Your blog is Okay, any craic though?
Regards,
Olivia
Bath Store London
UK
There is no true customer that can give us a lifetime of dedication, all flavours go stale and tastebuds get bored.
keeping up with sales demainds, what your people want and how you can give you both of the deal party something extra is the main ingredient.
You will always get walkers
You might wish to review my blog of April 17th. In any case the measurements that are most meaningful are acquisition cost, annual spending and average time of retention. Most companies have no idea how long the averagfe customer stays with them. It is also important to understand the characteristic of acquisition and departure. I would suggest reading the paper titled “Incorporating Satisfaction into Customer Value Analysis: Optimal Investment in Lifetime Value ” by Park and Zhou.
customer aquisition cost is glanced over by so many
Yeah i agree lifetime customers actually will spread the word on if you actually do a good job.
“A customer for a lifetime” its like regular income if that happens and sometimes to achieve that you have to compromise also with client in certain topics
This is great! I had no idea how to find or calculate customer aquisition costs, or how to use them in my business. I am eager to learn more. You’ve found yourself a loyal reader, for sure.
Thanks, Rake.
Thanks for the recap r8r, its really easy to forget the fundamentals that gets your knowledge up and running.
But in the end, there will never be a lifetime valued customer, all you can do is give your customers a nice stay, fluid conversation if questions gets asked, and everything you can do to make your customer feel right at home. And the sad part, if you dont have something they want, some costumers go to another shop, find it, and find out the other products are 2$ cheaper than yours, and they prefer that store.
Anyways Thanks a lot!
There is nothing wrong with explaining the fundamentals. It never hurts to have a refresher course and refocus yourself and your business model.
Well an excellent information about the web marketing.. Great job done.. Thanks for the post..
Everything you can do to make your customer feel right at home. And the sad part, if you don’t have something they want, some costumers go to another way after leaving you…
As they said customers are always right. Every business owner has only one main goal that is to pleased the wants and needs of their valuable customers.
Great post. Lifetime value of a customer is the present value of the future cash flows attributed to the customer relationship.
Nice post ! It is also important to understand the characteristic of acquisition and departure. Great job done. Any case the measurements that are most meaningful are acquisition cost. This is great!
This is great! I had no idea how to find or calculate customer aquisition costs, or how to use them in my business…It is also important to understand the characteristic of acquisition and departure. I would suggest reading the paper titled “Incorporating Satisfaction into Customer Value Analysis: Optimal Investment in Lifetime Value ” by Park and Zhou……great blog thanks for sharing….
Truly, i like your blog theme, it so simple and clean.Well an excellent information about the web marketing.There is nothing wrong with explaining the fundamentals. It never hurts to have a refresher course and refocus yourself and your business model.Thanks.