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