What is the lifetime value of one of your customers or clients?
It’s a simple question, but it’s not always the easiest to answer.
What is the average purchase price?
How many purchases does your average customer make in a year?
How many years does your average customer stick around?
There are obviously industries where these numbers are easy to find and calculate. Things like insurance, banking, telecoms. Customers are sticky, and relationships are often measured in years or decades.
There are industries where there is a huge difference between casual and frequent customers. They tend to know this and act accordingly. Think industries with significant loyalty programs like airlines and hotels. Also, if you stop to think about it…bars.
And then there are the industries/categories where the frequency or purchase value in a given day/week/month/year can fluctuate wildly. Think about things like fast food, grocery store impulse purchases or any other FMCG.
At a simple level, it can be expressed as the following:
AVG Purchase Price X # of Purchases a year X # of years customer stays = Lifetime Value
The variables that are specific to your business or industry can make that equation wildly variable. But knowing the answer, or the multiple answers as the case may be, can help you make better decisions when it comes to customer acquisition and how to focus your marketing efforts.
Here’s our basic lifetime value calculator. Because we like you, we’re adding a few questions to make it harder to answer but more useful.
- Do we have an “average customer” or should we segment into multiple different “average” buckets?
- Do we have heavy-user customers? Did they start out that way, or does a certain % of your casual customers become regulars?
- Regardless of purchase frequency, are there customers who purchase way more? A mom of a family of 5 vs. a single person at a grocery store or the person booking for a large group?
- How many of these damn sheets should I fill out?
Knowing the lifetime value of a customer (or different customer segments) can be useful for any business. We’ve found it to be powerful in determining reasonable customer acquisition costs (CAC), where it can really change outlooks on how marketing efforts should be focused.