In marketing terms, the lifetime value of a customer is a term used to describe a prediction of the net profit attributed to the entire future relationship with a customer. Lifetime Value is one of the most overlooked and least understood metrics in business; even though it’s one of the easiest to figure out.
Knowing this number is significant because it tells you how much repeat business you can expect from a customer over the course of your relationship. It also helps you calculate how much to spend on the acquisition of customers as well.
Once you know how much a customer will buy or spend with your company, you will better understand how to allocate your efforts.
Let’s head over to the whiteboard and see how to break this down.
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
Let’s observe an example here. Bob owns a Dance Studio. His average monthly membership is $60.00, paid monthly for 12 months per year and his students tend to stick around an average of 3 years. How would we figure this out?
$60 x 12 months x 3 years = $2,160 TLV
Once you have identified the lifetime value of your customer, you have two options in deciding how much to spend in the acquisition process.
#1 Investment acquisition cost.
Investment acquisition is the cost you’re willing to spend per customer knowing that you’ll take a loss on initial or even subsequent purchases. When using this tactic, you should have the cash flow and other resources that allow you to absorb this initial marketing investment, knowing this is a long-term strategy to acquire and retain long-term customers. In plain English, this is you as a business owner, spending $1000 this month to try and gain customers knowing it may take a few months to recoup that expense. But your LTV is so high that even if you gain one customer you know you will be ok.
#2 Allowable acquisition cost.
The allowable acquisition is the total cost you are going to spend per customer per campaign. With this tactic, the value will have to be less than the profit you plan to make on your first sale. This is the short-term solution when cash flow is a concern. In plain English, this is you spending $20 to get clients for a $100 product because your built-in expenses are $80.
These calculations can get a lot more complicated but focus on the Lifetime Value for now. If you Google any of these terms you’ll get the actual formulas used to calculate them.
Regardless of whether you choose to follow an Investment or Allowable Acquisition Cost, you’ll never know how to develop an estimated spend for a campaign unless you know the Lifetime Value of a client. This is crucial info because it helps you make educated decisions based on the reality of your numbers.
Take some time to work on the numbers. And remember, nothing happens in business without sales. Marketing drives your sales and keeps your company from falling into that black hole known as obscurity.
Well, that’s a wrap for this week! I want to thank you for checking in. Make sure to hit that like button. And if you have any questions or comments leave them down below. If you want to talk about how Blue Fish can help you grow your business just send us a message and we’ll get the conversation started!