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.
This is pretty informative article regarding life time value of customer. We all know that customer is king and we have to provide an optimum results. Really a great blog to get information.
Lifetime value of a customer is a really good way of looking at things. I guess I have fallen into the trap of just looking at sales without figuring where those sales came from. Was it from new or existing customers and more to the point, was I doing enough to increase the value I was getting from existing customers? Probably not.
@Mr Google Secrets
agree with what you said. This is a factor which most of us (sellers/entrepreneurs) tend to forget. We are so happy about the increasing sales but we don’t study where it came from. Sometimes we tend to ignore the customer who has small purchasing power but when you look at it very closely, they are the ones who keep coming back to us unlike others who are just “one-time-big-time clients”
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rights of birth parents
Staying in tune with your customer when it comes to internet marketing can be done through email marketing and good customer service in terms of follow-ups, maintenance and other regimens that cater their needs. Really good post, because it speaks to the most important factor of the whole game.
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Lifetime customers are not an easy job to cope with. They only remain as long as they are getting what they need. So it is important to have proper communication and to study what benefits them and what caters to all their needs.
Lifetime customers especially online is hard to define. Its so easy to switch loyalty as well as opt-out of someone’s list. Perhaps the only way you can define your lifetime customers are those who talk to you and consistently buy every product that you have. just my 2 cent worth.
thanks
leanne
webmaster, Luminess Air
Lifetime costumers is not easy to take. It is great to have that one. Opportunity knocks on you so grad that. We need to gain there trust so that it can make you a better one.
Great point, many people don’t take this into consideration when thinking about advertising costs.
I read somewhere a study of the lifetime value of a customer to several different types of business and was amazed at the figures. I can see now why some companies spend so much money on initial advertising.
Sam – Club Car and Ez Go Golf Carts
Since I want to use some of this, I wont copy it. I will just link back to the Post. Sound ok ?
LCV is a tough calculation for most companies. The reason is you need a customer history in order to calculate it. So for a start-up, the next best thing would be to look at an established company in your niche, gather whatever intelligence you can about then (i.e. get on their list, go through their sales funnel, create alternative conversion scenarios) and then look at what each scenario calculated out to. At that point, best to probably go with the conservative assumption.
I read somewhere a study of the lifetime value of a customer to several different types of business and was amazed at the figures.I guess I have fallen into the trap of just looking at sales without figuring where those sales came from.Anyway, thanks for sharing.
I am from elysia leech
I read the article to know the lifetime value of a customer. Customers will be happy if they get the opportunity from the authority.
It was definitely a surprise to learn that keeping a customer is cheaper than getting a new one. I always figured that as a customer ages with your business, their demands and needs might be higher, or expectations. But now that I think about it, I’ve been with Comcast forever and as an older customer, I don’t get the same benefits as a newly recruited one. Kind of backwards.
Steve
My site: does creatine help?
I agree that you should focus your time and attention to those who give you the most return.