Many businesses determine the value of a customer based on how much they spend on their first purchase. For example, if Jane spent $54.00 on her purchase, many businesses would assign Jane a value of $54.00 in revenue. If Jane comes back another day and spends $28.00, her customer value would have increased to $82.00
If your business determines customer value the way we illustrated above, that means that your business focus is on the immediate sale rather than on the customer, which is where it belongs.
Business managers, who are familiar with the lifetime value of the customer (LTV), realize that Jane??™s value to the business is much greater than the first method acknowledges. Jane??™s value to the business is the sum total of all purchases she has made already as well as all purchases you project that she will make in the future. In other words, the total amount of money that you project she will spend with your business from her very first purchase to her very last.
Determining The Lifetime Value Of An Average Customer
There are several reasons why you should want to know the lifetime value of an average customer in your business, but perhaps the most important one is so that you will know how much you can afford to spend to acquire a new customer. This piece of information will be critical when determining your marketing and advertising budget, and is a great guideline to use when assessing the effectiveness of a particular ad.
For example, if you know that running an ad in a publication costs $1000 and that ad brings you fifty new customers, it will cost you $20 for each customer you acquire. If the projected lifetime value of each customer is $3,800 your $20 was well spent.The lifetime value of an average customer can be determined with some basic business averages.
To calculate the life time value of an average customer multiply your average sales by the average number of times that customers come back for repeat purchases. For example, if the average customer spends $38 when they buy from you and they make, on average, 25 purchases from your business, the lifetime value of your average customer would be $950.
Once You Know The Lifetime Value (LTV), You Can Determine The Lifetime Profit (LTP)
Knowing the lifetime value of your customer is important; but in order to know how much you can really afford to pay to acquire a new customer you will have to take it one step further and determine the average profit that you will make. The lifetime profit of the customer is the actual amount that your business will make from the purchases of an average customer over the entire life the business arrangement.
The lifetime profit is figured the same way as the lifetime value, only this time using the average profit from each sale.
Staying with the same example that we used above where the average sale was $38, let??™s say that the profit from that average sale is $18. Using the same number of purchases??”25??”the lifetime profit from each customer would be, on average, $450. This is the figure that should be used when determining how much you can afford to spend to acquire each new customer.
Things You Can Do To Increase The Lifetime Value Of Your Customers
Building a good rapport with your customers and offering personalized service can do wonders to increase your customer LTV. In today??™s competitive market place, the consumer has a lot of choices of who he wishes to do business with. If you build a personal relationship with your customers they will be more likely to select you as their product or service provider. .
Business is about building relationships; and good relationships are built through good communication with your suppliers, your employees and your customers. It is important to always be available to answer customer questions and address customer concerns.
In short, good customer service will almost always lead to increased purchases and more repeat sales; both which will help to raise your customer LTV.