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Determining Lifetime Value of a Customer

1 Feb 2006

Determining Lifetime Value of a Customer

Do you know how much a new customer is worth to you? There is a term called "lifetime value of a customer" that should be used by anyone in charge of the marketing for their business.

Lifetime value of a customer tells you how much profit you earn from an average customer over their lifetime as a customer for your business. This is important to know so you can determine what you can afford to pay for a new customer.

With this understanding, you can keep you from making bad marketing decisions. For example, If your average lifetime value of a customer was $3,000, it would make sense to "buy" as many customers as you could if you could get them for $300 each wouldn't it?

Let's say you do a marketing campaign to get new customers and you make $10,000 in sales from the program but the campaign cost $15,000. It would be easy to conclude the program was a failure. But, what if that $10,000 in sales came from 20 new customers? If the lifetime value of a customer is $3,000, these 20 customers are ultimately worth $60,000 to in total profit for a cost of only $5,000.

Looks like success to me, not failure! By knowing this, the same campaign with the same result has changed from a disaster to a profitable program that should be continued. Here's how to calculate this all-important number:

   1.   Divide your annual sales by your number of customers to get the
         average annual sales/customer.

   2.   Multiply this by your average gross profit percentage to get the
         average annual gross profit/customer.

   3.   Estimate how many years you retain an average customer. (You can
         calculate this if you know how many accounts you lose each year -
         divide that number into your total number of customers to get the
         number of years an average customer stays with you).

   4.   Multiply the profit in step 2 by the number of years in step 3 to get your
         estimated lifetime value of a customer.

For More Information Contact:

Joe McVoy
Profitable Marketing Systems, LLC
1100 Nautilus Court
Lafayette, CO 80026
Web: www.ProfitableMarketingSystems.com
Email:
Phone: (720) 890-8760
Fax: (303) 604-6839

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Joe McVoy

"Don't Spend a Dime on a Website That Doesn't Get You Results"
Ottawa's Web development, SEO, Copywriting & Web Results Company