We all love and value our business customers.
But do you really know your business' actual customer lifetime value?
Surely, if you know how much every customer is worth to your business, then hopefully it will change the way you treat them?
Understanding your customers lifetime value is an important part of knowing the value of every transaction in your business.
Knowing the actual lifetime value of your customers will enable to plan your marketing more effectively and even refine your prices accordingly.
ROI: Recurring vs Non-recurring customers
For example, let's pretend you are selling a shoes worth $100 and let's also say it cost you about $50 to win a every new customer (Through advertising, marketing, time etc).
Knowing whether your customers are making just a one off transaction or will be making recurring purchases can greatly effect they way you view you $50 cost to acquire each customer.
Scenario A: If that customer buys your shoes just the one time, then yes their value is $100 and the $50 you have spent on winning them over can seem quite high.
Scenario B: However, if you know that one customer would be a repeat purchaser of your shoes, then over the next 5 years they may very well be worth $2,000 to you. Now how does that $50 sound?
Calculate the lifetime value of your customers
Below I have demonstrated how you can easily work out the actual customer lifetime value for your business is. Make sure you are doing your figures based on new clients in one year.
Firstly split your customers into 2 types:
- A: Recurring purchase customers
- B: One-off purchase customers (Non-recurring purchases)
Then fill in your business statistics using the below example.
For this example I have said that this particular business gets:
- 100 x one off purchase customers each year that spend $100 per transaction.
- And also gets 10 x recurring customers each year who spend roughly 5 x $100 transactions, and shop with the business for about 5 years. This gives the business a total Lifetime Customer Value of $35,000.
Average recurring purchase per customer: $100
Average purchases per year: 5
Average client life time: 5 years
Total purchases by customer over their lifetime: 25
Ave revenue per customer: $2,500
Number of your customers who are recurring clients: 10
Recurring Lifetime Customer Value: $25,000
B: One-off purchase customers (Non-recurring purchases)
Average one-off purchase per customer: $100
Total purchases by customer over their lifetime: 1
Ave revenue per customer: $100
Number of your customers per year: 100
Non-recurring Lifetime Customer Value: $10,000
Total Business Customer Lifetime: $35,000
As you can see, understanding how much every customer is really worth to your business can help you plan and market your business in a far more effective manner. You may realise that there is a certain sector of clients who are highly profitable over time due to their repeat spending.
A good blog to maybe read about recurring income is this one:
5 reasons to turn your business into a subscription model
Want to find out how Inbound Marketing can help your business?
Why not give Pixel Fish a call today on 02 9114 9813