Marketing - Calculating The Lifetime Value of your Customers
 
 
One of the most critical factors to understand when you are looking at an investment in marketing and sales is the lifetime value of a customer.  It's a marketing concept that is rarely understood, even by existing successful enterprises, but without this information, you can never have a real understanding of how much you can afford to spend on the recruitment of new customers. 

In the course of the past 10 years we have studied the methods and techniques used by hundreds of different businesses to generate profits. 

One of the most important factors discovered in marketing is that of calculating the lifetime value of a customer.  Until business owners understand this concept they will undervalue the potential benefit from an investment in marketing and sales to recruit and retain customers. 

Understanding that new customers might stay for a period of 4 or 5 years spending thousands of pounds means that there is often quite a high acceptable cost of acquiring a new customer which is related to the future profitability of that customer rather than looking at a short-term profit requirement from each element of the marketing cost. 

 

LIFETIME VALUE CALCULATION 

Average profit per new 
customer sale    £100 

Average No. of 
purchases each year       4 

Average no of years 
each customer stays 
with you        5 

Lifetime Value 
or Net Worth     £2000 
 

Of course, you have to understand the cash-flow implications of trading in this way, but the longer-term impact can be substantial once you understand the concept. 

Without attempting the above calculation (based on factual history of an average customer) you may think from the first purchase that to spend any more than £100 on acquiring your new customer would give you problems.  However once you recognise the ongoing value of the customer, you can see that spending £300, £400 or even £500 on customer acquisition could still leave you with a healthy "lifetime" profit for the average customer, ie. overall within the business. 

 

 

 

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