Determining Customer Lifetime Value

Do you know how much a new customer is worth to you? There is a term called "lifetime value of a customer" or "customer lifetime value" that should be used by anyone in charge of the marketing for their business.

Customer lifetime value tells you how much profit you earn from an average customer over their lifetime as a customer for your business. This is important to know so you can determine what you can afford to pay for a new customer.

With this understanding, you can keep you from making bad marketing decisions. For example, If your average lifetime value of a customer was $3,000, it would make sense to "buy" as many customers as you could if you could get them for $300 each wouldn't it?

Let's say you do a marketing campaign to get new customers and you make $10,000 in sales from the program but the campaign cost $15,000. It would be easy to conclude the program was a failure. But, what if that $10,000 in sales came from 20 new customers? If the lifetime value of a customer is $3,000, these 20 customers are ultimately worth $60,000 to in total profit for a cost of only $5,000.

Looks like success to me, not failure! By knowing this, the same campaign with the same result has changed from a disaster to a profitable program that should be continued. Here's how to calculate this all-important number:

1.  

Divide your annual sales by your number of customers to get the average annual sales/ customer.

2.  

Multiply this by your average gross profit percentage to get the average annual gross profit/customer.

3.  

Estimate how many years you retain an average customer. (You can calculate this if you know how many accounts you lose each year—divide that number into your total number of customers to get the number of years an average customer stays with you.)

4.  

Multiply the profit in step 2 by the number of years in step 3 to get your estimated customer lifetime value.

For More Information Contact:

Joe McVoy
Profitable Marketing Systems, LLC
1100 Nautilus Court
Lafayette, CO 80026
Web: www.ProfitableMarketingSystems.com
Email: Joe@ProfitableMarketingSystems.com
Phone: (720) 890-8760
Fax: (303) 604-6839

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© 2006 Profitable Marketing Systems, LLC