Customer Lifetime Value: How to Calculate
Regardless of whether you’re a small café owner or a sales manager of an international company, truly understanding your customers enables you to make informed, critical decisions about sales, marketing, and your brand.
Okay, you think you know your customers, but do you really?
Some of the most interesting data your business can produce is measuring your customers’ lifetime value. And sometimes, the results can surprise you!
So, what is a Customer's Lifetime Value?
Lifetime value is the estimated revenue a customer will generate during their entire lifetime with your company. Calculating the lifetime value (LTV) of customers is a great way to budget your future marketing, retention, and new customer acquisition costs.
LTV research reveals how much your customers spend, how often they spend and what marketing ploys inspire them to buy more or become those favorite regulars you see every day.
Understanding your customers allows you to position your brand more effectively. Thus, be more productive with your time and money.
There are many complicated ways to determine your customers' lifetime value, but the simplest way is to average your variables.
You should use a pool of loyal, regular customers for your research, to make it as accurate as possible.
Your regular customers spend an average of $5 per visit with an average of 4 visits per week.
$5 x 4 = $20
$20 per week x 52 weeks in a year = $1040 per year
Multiplied by an average retention span of 10 years.
($5) x (12 months) x (10 years) = $10,400 (Average customer lifetime value)
The average retention span of customers will vary greatly depending on your type of business, but with your variables as accurate as possible, you should be able to identify which customers will be the most profitable long term.
You can get more detailed by creating variables for your different types of customers.
For example, a customer who spends $5, 4x a week, will be more valuable than someone with a higher average spend of $7, who only comes in on Tuesdays.
How does determining the lifetime value of your customers help with your business?
By establishing how profitable your customers are, you can determine what your marketing budget should be to acquire them. There’s no point spending lots of money on flashy advertising if it brings in cheap buyers who do not return.
Loyal, high spending customers may take more money and time, plus an in-depth marketing strategy to acquire, but they will be more profitable over their lifetime with your business.
For example, the office across the road holds 25 coffee drinking employees.
It’s better to get their regular loyalty than advertising for a customer who doesn’t often come to your café.
Or, if a sales rep for a large beer company approaches a popular chain of thirty restaurants, it will take a lot of time and effort to lock down the buyer, make an agreement and eventually close the sale.
However, the LTV of a thirty restaurant chain will prove much more profitable than a small restaurant that opens for dinner two nights a week.
Are these potential customers worth the investment?
That’s what your LTV research will tell you because it will predict the future behavior and spending of buyers.
You can also substantially increase profits by focusing on improving customer lifetime value.
We all know that acquiring new customers is more costly than retaining them. So, the best way to increase LTV is to create brand satisfaction and happy buyers that return time and time again.
Have you ever wondered why your favorite coffee shop has free wifi, comfy chairs, and great perks? While one coffee may cost $5, retaining a customer’s business over 7-10 years could be a LTV of $10,000.
Isn’t that worth free wifi?
By increasing customer retention efforts, you can substantially increase lifetime value and therefore long-term profits. It’s not just about your product, but the staff, the atmosphere, the support, and the brand.
So, the best way to predict your business success is to determine the lifetime value of your customers. You'll know where and with whom to focus your time and money.