So far in this series we’ve talked about how it’s important that before you launch into any marketing campaign, you need to weigh the costs against the estimated benefits.
But in order to accurately assess those benefits, you need one critical bit of information… your customers’ lifetime value.
What is “customers’ lifetime value”?
Lifetime value refers to the amount of revenue and profit you can expect to receive from your ideal customer over the term of your relationship.
Knowing your ideal customers’ lifetime value gives you a tremendous advantage. This information drives all your lead-generation and marketing decisions, and allows you to focus your marketing dollars with far greater precision, accuracy and productivity.
Not knowing this number leaves many businesses floundering in their marketing efforts, making hasty and ill-informed marketing decisions, some of which can even prove fatal to their design businesses. Launching a marketing campaign without knowing this number is like driving a car without knowing the direction you’re heading in.
How to calculate your customers lifetime value
Calculating the lifetime value of your customer is quite simple.
First, estimate the amount of money the customer will spend with you throughout his or her “lifetime” with your business.
Let’s say you sell a product for $100 and your customer purchases it once every 3 months (4 times per year). Using the default lifetime of 5 years, this give us a lifetime revenue of $2,000 ($100 x 4 purchases per year x 5 years).
Once you have your lifetime revenue, simply subtract all the expenses involved in generating that revenue… Things like your total cost of goods sold, sales & marketing costs, and any other costs involved in acquiring that customer.
Let’s say that $100 product you sell costs you $10 to produce and deliver. Because your customer purchases a total of 20 times (4 times per years for 5 years), your total cost of goods sold is $200 ($10 Cost x 4 times per year x 5 years). Now let’s also say that you spend $90 in sales and marketing to acquire that customer. Plus another $500 cover 5 years worth of communicating with that customer. That’s a total cost of $790 ($200 + $90 + $500). The lifetime profit for this customer would be $1,210 ($2,000 lifetime revenue minus $790 in total costs).
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