What is each customer worth to you?
The lifetime value of a customer is one of the most important numbers in a business (next to how much cash you’ve got in the bank). Lifetime value helps make decisions around marketing, sales, customer support levels, new product development and more.
Lifetime value looks at the total profit from each customer over the length of your total relationship with them.
Why it’s important
Some customers are created more equal than others. By understanding the lifetime value of each type of customer then you’ll know:
- How much to spend to “buy” that customer initially, in both cash on marketing and in time.
- How many resources you invest in each customer’s retention plan, how much you’re willing to concede if the customer wants to switch supplier.
Knowing what someone is worth to you also helps sweeten the conversations with those tricky customers (you know, the one that makes you feel like you’re swallowing a dead rat whenever they call).
How to work it out
How you work out your lifetime value will depend on your business.
Example One – A Gym
Each person at the gym signs a 12-month contract, $30 per week of sales, or $10 profit per week. 30% of customers renew their contract for a further 12 months.
For the first year, the customer is worth $10 x 52 weeks = $520. For the second year, there’s a 30% chance of them renewing, so we’re going $520 x 30% = $156. The total value of that customer is $676.
The gym owner can then decide that they’re willing to offer a 3-month free trial, because the cost of that 3-month trial is less than the lifetime value of that customer.
Example Two – A Plumber
The average invoice issued by the plumber is $1200. The profit from each invoice is $400 (after wages, running costs and purchases are paid for). Each customer in general has an issue every 5 years, and in general remain a customer for 15 years (being how long they live in the same neighbourhood as the plumber).
The lifetime value of each customer is $1,200. With this data, the plumber could decide to give each customer 1 hour free per year (or a $75 voucher) to keep them “sticky” to their business and to encourage them to shop more often.
Example Three – A Lawyer
For many businesses, like lawyers, it’s tempting to say that customers come back no matter what – if you need a lawyer you’re going to call. On the face of it, that’s a compelling argument. What it misses though is the opportunity to upsell and constantly reach out to your customers.
For a lawyer, if the average job takes 4 hours, the profit would be around $500. If each customer has a legal issue every 3 years, with a 9 year relationship with each lawyer, then the value is $1,500.
The trick for the lawyer then becomes to increase their marketing to get each customer coming back to them with a legal issue every 2 years. This pushes the lifetime value from $2,250. What the lawyer does for each customer now that they’re shopping with them more often is a topic for another day, but ultimately there’s an extra $750 of value from each customer.
The question for them is then whether the extra $750 from each customer is more or less than the cost of acquiring a brand new customer from scratch.
What you can do
The first step to working out the lifetime value of your customers is to download our calculator here.
Once you’ve worked out what your customers are worth to you, schedule an appointment and we can show you what to do with that information.