Do you know what your lifetime customer value is? In simple terms it’s the value, measured as an asset, that a person brings to a business during the span of time in which that person is a customer. Understanding LCV is important when it comes to making decisions based on efforts related to customer acquisition and customer retention. When it comes to online marketing, lifetime customer value is a primary metric that can be used as a benchmark when deciding how much to invest in campaigns related to acquiring new customers.
What does it take to earn one new customer?
The first step in determining LCV is to calculate how much one new customer is initially worth.
For example let’s say that your company sells several products and/or services and when combined together they average out to a cost of $100 with a 20% profit margin. For every $100 a customer spends your company is taking in $20 profit.
The next step is to find out how often an average customer reorders your product or service. The quality of data you have to work with will largely hinge on how long your company has been in business (new companies with few customers will have a difficult time calculating this information) and the type of CRM system you’re using. Some CRM software will interpret the data for you and with others you’ll be left to analyze the data and do the calculations for yourself. The more data you have to work with the more accurate the number is going to be. Depending on your industry and specific business, you may have a high churn rate where customers purchase once and rarely return, or a low churn rate where customers return and purchase often.
For the sake of simplicity, let’s say the average customer purchases from the company approximately 2.5 times over the length of several years. If we use the first example as a reference the average customer would have a value of $250 with a profit margin of $50. This logically shows us that a marketing campaign that can acquire customers at a rate of $10 each would be a wise investment and a campaign that brought in new customers at a rate of $70 wouldn’t be worth the cost.
It’s true that finding the sweet spot where customer acquisition becomes profitable is easier in theory than in application, but if you’ve done the work and have correctly calculated lifetime customer value, it can be an incredibly valuable metric that can be used again and again to help guide decisions related to online marketing.