I'D LIKE TO PURCHASE SOME OF YOUR CUSTOMERS ...
Can You Tell Me What They're Worth?
by Chris Ayers
Lifetime Value of a Customer. Have you heard the term before? Probably. But here's an even better question ... Can you tell me what the number is for your business?
If you can, you're ahead of the game. If you can't, this article is for you. Because I strongly believe that if you own your own business, this single number might be the most important one you'll ever calculate! But before you rush out for your calculator, let's talk a little about what the Lifetime Value of a Customer is and why it's important.
The Lifetime Value of a Customer or LTV is the amount of profit that your average customer will generate over the lifetime of their relationship with you.
You might see it defined elsewhere in terms of sales or revenues, but I think defining it in terms of profit is an important distinction. What you really want to know is how profitable
relationships with your customers are, not just how much revenues they produce.
Why is this number so important? There are plenty of reasons. I'll give you six big ones:
- Unless you know what a new customer is worth to your business, you really don't know how much you can afford to spend to acquire that new customer.
- Knowing how valuable each customer is will help you deliver great customer service and focus more on customer retention, even when it requires a little "extra effort" on your part.
- Focusing on LTV of your Customer can help you move away from thinking about one-time sales and closer to creating and nurturing relationships with your customers.
- Companies that understand LTV of their Customers retain more of their customers. If that weren't enough, they also tend to keep their customers longer.
- The longer your business keeps a customer, the more profitable they become. More profitable not only in terms of sales but with regard to referrals as well.
- LTV is a much better measure of advertising and marketing results than leads generated or even sales.
For example, if you run an ad that costs $5000 and you only get $100 in sales ... is it a bust?
Maybe ... or maybe not. If I told you that the same ad resulted in 5 new customers, each with a LTV of $200, what would you say?
I first heard about the concept of Customer LTV at a Direct Marketing seminar. One thing that the speaker said has managed to stick with me over the years.
He said "A single sale is meaningless ... unless of course you're planning on going out of business next week."
Pretty profound, I thought, when I first heard it. A golden rule to live by for today.
Have I convinced you that you really need to know the LTV of your customers? I hope so. Now that you know how important this number is, how do you go about calculating it?
The data that you gather falls into three categories:customers, revenues, and costs. But before you get to the data, you must establish a timeframe.
Here's the steps to do the LTV calculation:
A. Determine Time Period
Your first step is to define a specific time period for which you will collect some data. It is easiest if you choose a multiple of months easily divisible into 12, such as 1, 3, 4, 6 or 12.
B. Customer Data
For this time period, identify the number of customers at the beginning of the period and new customers obtained. If possible, you'll also want to know how many of the new customers came from referrals and how many customers were lost during the period.
The last piece of customer data you will need is an estimate of the life of the relationship of an average customer.
C. Revenue Sources
Gather all the sources of revenue for the time period. If you have a web site or a newsletter, this might include advertising revenues, product sales, affiliate sales, and
consulting. If you add all of these values together, this represents your total revenues.
You'll also need to know the number of sales that make up the revenues.
Just as you did with revenues, you'll need to tally all of the associated costs during the time period. This includes such costs as advertising and product fulfillment.
Finally .... you have all of the data that you need to calculate the LTV for your average customer. But, alas ... my time with you for today has run out :-(
But .... there is good news! I've created a simple Excel worksheet that you can download from my web site that will help you calculate your Customer LTV. All you do is plug in the numbers that you've collected, and wa-lah! You can download this worksheet at
Be sure and open Excel and then open the file "ltv2.exe", instead of trying to double-click on the file itself (the computer will think its a program file). Then you can save the file with whatever "name.xls" you'd like :-)
I haven't forgotten about you Mac users and those of you without Microsoft Excel. There's a text file for you to open at the same location.
Once you know the number for your own business, how can you improve it? There are five things that you can do to improve:
- increase the lifetime of your relationship with customers
- increase the number of referrals from your customers
- increase the size of your average sale
- increase your profit margin
- increase the number of sales to each customer
Don't forget to visit my site and download either the Excel worksheet or the text file. The location of the files is http://unlimitedtraffic.com/products
It might seem a little time consuming but, go on ... take a stab at it. This single number can tell you an awful lot about your business ... as much as any other single number you might ever know!!
©1999 by Chris Ayers. All rights reserved.
Chris Ayers is an Internet Marketer and publisher of the FREE newsletter, "Unlimited Traffic!" Put his 10 plus years of experience in Direct Marketing and on the Web to work for you.
Visit his site at unlimitedtraffic.com or subscribe to his newsletter with message to [email protected]