The most difficult and expensive sale we ever make to a customer is the first one. In that first, important, transaction we earn or lose the trust of the customer.
Think back about your own consumer experiences – have you ever been just a little concerned about your first purchase from a business? It might have been from that florist delivery service you’ve never used before, or that tradesperson you’ve hired, or even product related concerns, say about a new computer or air-conditioning unit.
Once we have the trust of the customer, we open the door to many more sales and referrals.
Why would you want to know the lifetime value of a customer?
The lifetime value of a customer is a measure of the value of the customer to your business. It is the potential contribution of the customer to your business over a period of time. When you know the lifetime value of a customer, you have an understanding and awareness of how much you would or should be willing to invest to acquire a customer.
Mary is a new customer. Mary spends $60 with you, but it costs you $20 to supply the product or service and $40 to acquire Mary as a customer. You might think that acquiring Mary was pointless, i.e. no profit was made. But if I was to tell you that Mary needs to repurchase or revisit every six weeks spending $60 each time, with a profit to you of $40, plus Mary begins refers other people to your business, essentially costing you zero in advertising costs… Well, I’m sure you can see the benefits here.
When you evaluate the effectiveness of your marketing, instead of focusing on that initial, single transaction, you should really focus on the Lifetime return for the investment made.
Lifetime Customer Value = average customer spend X number of times of repurchases in a year X the number of years a customer stays with your business (on average). PLUS Referrals!
Using our Mary example:
LTV = $60 X (52 weeks in a year / 6 weeks) X 5 years = $2,600
Would you spend that $40 to acquire Mary if she was worth $2,600 to your business PLUS referrals? I hope you said YES!
If you understand this significant marketing principle, you’ll see that you can now justify a much greater advertising/marketing investment when you look at your returns in this way, and this provides the engine for significant business growth.
Often your competitors are too cheap to make this important investment, and this can give you a competitive advantage.