What is the lifetime value of a customer and why is it important?

Calculator for computing lifetime value of a customer.
http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html

Transcript of Video
What Is The Life Time Value Of A Customer?

To make this short and sweet. The lifetime value of a customer is the total revenue a single customer will bring to a business. This financial value is based on a few metrics which I will explain in detail in a few minutes. The simplest way to understand the life time value of a customer is, how much money a customer spends with your business over the customers lifetime.

Why is this metric valuable?
When marketing, we sometimes find that acquiring a new customer costs more than what is recovered on the first transaction. This forces the business to implement a remarketing campaign, if they don’t already have one. All businesses should have a remarketing plan because businesses make more money, on a whole, from their current customers than on acquiring new customers.

If the business owner does a good job of servicing their customers they create a greater revenue stream that could lead to repeat business, and even better, referrals!

So, in this situation if a business loses money on the first transaction, they can recover on the second and be in profit mode on the third, fourth, fifth, and sixth transaction.

Obviously, every business has different profit margins and some business are in profit on the first transaction. But as always, not all business and sales are created equal.
But what the Life Time Value of a customer mindset can bring to your business, is a deeper understanding of the value a customer has on your business. If you know 1 customer will bring $175,000 into your business over their lifetime, you would surely treat them differently than if you just simply didn’t know or thought it was based on that 1 off transaction.

When I help business figure out their customers lifetime value, I see two things, a big light bulb go off in their mind with an aha moment and excitement about bringing in new customers, and better servicing of current clients.

Now, finding out the life time value of a customer, you simply calculate, the average spend a customer makes at your business multiplied by the number of times the average customer buys in a year. (This can be a fractional number too if customers don’t buy every year.) Than multiply that number by the length of time your average customer will buy from you in years. 5 years, 10 years, 30…50.. etc…

For new businesses this can be difficult since some of these metrics aren’t available. You can estimate possibilities which will also help shed light on treating your customers like gold. :)

This metric is extremely important because it will shed light on the value potential of your business, the successes and failures in your customer service, the successes and failures in your remarketing campaigns.

If you would like a fantastic tool to help you identify this number check out . Click on the tool tab on the top of the page and on the right hand side of the menu bar.

Before you do any type of marketing you need an idea of the lifetime value of your customers.

If you would like help with this, give me a call. 515-978-8087 and I would be happy to help you.