What lasts a lifetime?
I was thinking the other day about what actually lasts a lifetime?
There aren’t many things anymore. Careers are now job hopping. Cars breakdown quicker than ever before.
I found a Business Insider article that talked about 22 items that everyday people on Reddit said “last forever.” I was expecting some great insight, only to find that 2 of the first 3 involved video games. Sorry that’s not what I was looking for.
Because of our ever changing culture and technology, it’s hard to think in terms of a lifetime anymore. It’s just not what it used to be.
One thing we absolutely must consider in terms of lifetime however are our customers.
Do you know the lifetime value of your customers?
This number, commonly referred to as LTV, is extremely important to your business. If you have never considered this number, let’s run through the calculation so you have this number going forward.
The goal is to identify approximately how much a new customer on average is worth to you.
This is best determined in profit dollars, not gross sales.
Take your total revenue divided by the total number of customers you serviced during the year to determine what an average customer was worth to you for that year.
Now take your average gross profit on a sale and multiply that percentage by your average customer total.
This gives you the average profit from a customer in a year.
This in itself is a good number, but it’s only for one 12 month period. We need to also consider other factors that occur in your business and determine the lifetime value.
You have to make some assumptions, but use your gut, you know your business best. On average, how long will a customer buy from you? If you have hard facts, great, if not, do your best to guesstimate this number.
How about referrals? Do most of your customers give you referrals? All your customers? None? (that’s another blog topic for later).
You also need to consider that value that referrals add to a typical clients lifetime value.
Multiply the average customer profit by the average number of years they buy from you.
If you get on average 2 referrals from a client over that same period of time, multiply your average customer profit x 2 and add that to your total.
Now you have your Lifetime Customer Value.
Yes, it’s subjective. But it’s a big number. The point is that you fully understand the value of EVERY new customer and how important it is to retain those customers for as long as possible.
So let’s do some simple math to give you an idea.
Customers in a year: 200
Average Customer: (1,000,000 / 200) = $5,000
Average Gross Profit % = 50%
Average Customer Profit = ($5,000 x 50%) = $2,500 gross profit on average
Typical life of a customer = 4 years
Number of referrals given = 2
Average customer profit x typical life
+ number of referrals x (Average Customer Profit x Typical Life)
= Lifetime Customer Value!
$2,500 x 4 = $10,000
+ 2 x ($2,500 x 4 = $10,000)
= $30,000 Lifetime Customer Value!
See the value in knowing the Lifetime Value – NOT the transaction size!
Your average transaction could be anywhere from $500 to $5,000 or more, but if that is all you consider, you miss out on MULTIPLES of that number in true value to your company.
What is your Lifetime Customer Value?
Are you treating each customer as if they are worth that number? OR just as if they are worth the transaction at hand?
How else does this affect you – marketing dollars spent to acquire new customers, retention efforts to keep them longer, sales efforts to increase the average values, and more!
You can use this number over and over again to help keep you focused on the big picture value of a customer.
Go calculate your number now!
Customers might not last a lifetime, but you can calculate their value to your business based on their buying lifetime. Know your LTV – Lifetime Value!