How to Calculate the Lifetime Value of a Customer and Why It Matters
In order to make intelligent marketing decisions, there are a few pieces of information that are must-haves. One of those pieces is the Lifetime Value of a Customer. This is a dollar amount you apply to your customers based on how much they will be worth to you over the course of your business relationship.
This number will cause you to realize that some decisions appear bad, when in reality they are VERY GOOD! For example, my company, PostcardMania, actually LOSES money on every first time order.
Wait. What? If it costs money to get clients, how do we make money?
The trick is in the Lifetime Value formula. Return On Investment (ROI) isn't just what you make on the first sale. Even though we lose money initially, over the average lifetime of a client, we know we will make money â€” a lot of money.
Here's how to figure out how much a customer is REALLY worth to you:
1. Know the Numbers
Start by gathering this crucial data:
A Average initial ticket price (how much they spend when they first buy from you)
B Average reorder ticket price (the average ticket price of a re-order)
C How many times they re-order from you in one year
D How long a customer is retained (5 years, 10 years, etc.)
2. Apply the Formula
Dust off your algebra book. Using the letters above, plug your numbers into this formula: A+D(BxC)=???
Initial Ticket Price: $500
Reorder Ticket Price: $99
Number of reorders per year: 4
Average # of years a customer is retained: 5 years
The formula will play out like this:
500+5(99×4) Multiply 99 and 4
500+5(396) Multiply 5 and 396
500+1980 Add 500 and 1980
The lifetime value of the average customer in our example is $2480. Now you have to figure out what it costs you to acquire a new customer and what you should be spending.
Find out the Lifetime Value of your
customers with our Lifetime Value Calculator
. All you do is fill in the blanks and our calculator spits out your answer!
For help figuring out how your customers' lifetime value should shape your marketing, call my experts at 800-628-1804.
Joy Gendusa founded PostcardMania in 1998 with a phone, computer and no capital investment. Since then, she has grown the company into one of the nation's most effective direct mail marketing firms, specializing in postcard marketing for small to large-sized businesses. Over the years, she expanded to offer mailing list acquisition, website development, email marketing–all while continuing to educate clients with free marketing advice.
She has been named Tampa Bay CEO of the Year, Business Woman of the Year in Tampa Bay and has been featured on MSNBC's "Your Business." PostcardMania is an Inc. 500 and 5000 company and has won awards for creativity, best business practices and leadership. Find Joy on Google+
If you would like to interview Joy or book her as a speaker, please email firstname.lastname@example.org or call 1-800-628-1804 ext. 281.