What’s the first step to acquiring new customers?
Figuring out how much you can spend to acquire each customer.
And that amount stems from how much each customer is worth to your business over the lifetime of their patronage.
So, how do you determine lifetime value?
- How much is your average ticket price for your product or service?
Yes, there’s always going to be a range. But pick an average, not the one whale you brought in based on luck.
If you have a one-time purchase product or service, take an average of the purchase price if you have a number of different products or services.
If you have a recurring agreement, what is the average monthly amount?
- How many times does your average customer buy from you in a 5 year period?
If your product or service is a 1-time purchase, does your customer come back and buy it or another widget?
If you have a recurring agreement, how long does the customer generally stay with you? 1 year? 3 years?
A note: many people have customers that stay with them longer than 5 years, and that’s great! We use the 5 year period as a benchmark to determine average revenue from a new customer.
- Multiple the average purchase price by number of times they buy from you. Here’s the formula:
Average price/widget x # of times purchased in 5 years= average lifetime value
# of times purchased in 5 years- included similar or other product purchases.
For recurring agreements:
Average monthly agreement amount x # of months a customer stays with you= average lifetime value.
Here’s a couple examples:
- You manufacture widgets that cost $10,000 for 1 widget. A Customer may purchase 1 per year for at least 5 years. That means 1 customer is worth $50,000 over their lifetime.
- Your monthly service agreements average $1000 per month. So one customer is worth $12,000 over 1 year. Average length of the agreement is 3 years. So the lifetime value of your customer averages $36,000.
What’s next in your marketing formula? Determining how much you can spend to acquire that customer (customer acquisition cost). Click here to learn more.
If you’re looking for help on your customer lifetime value, marketing and getting your company in front of customers, we can help. Contact Jennifer at B Practical Solutions (firstname.lastname@example.org) or 708-403-5509.