Customer Worth
Knowing what an average customer spends is very different to understanding what they are worth in terms of Lifetime Value. Understanding Lifetime Value can help you understand customer behaviour can help with retention and allows you to spend more of your budget on acquiring higher Lifetime Value customers.
Average Customer Spend
Working out what an average customer spends is a fairly simple equation. Take how many customers have purchased your goods or services and divide by net profit omitting any marketing costs.
e.g. 10 customers, $500 on marketing with a net profit of $1,000 is an average worth of $100 per customer (1500 -500/10=100).
Lifetime Value Equation
When looking at Lifetime Value, you want to work out how much a customer spends with you over a period of time.
e.g. 1 customer spends $20 per month, every month. The marketing spend attributed to this customer is $100. Over the course of the year this customers Lifetime Value is $140 (20*12-100=140).
Initially though you may view the $20 per month customer as too hard as they are barely spending anything, when in fact they are spending more than your average customer. Of course it’s extremely important to treat all of your customers the same however when you add a Lifetime Value to a customer, it can assist with the following:
- Targeting – target customers better.
- Acquisition – acquire customers with a high Lifetime Value.
- Return on Investment – Calculate your ROI and use this to understand how to prioritize your marketing budget.
- Customer retention – Ensuring you’re providing a great service and relevant products to suit the customer.
If you would like to learn more about Lifetime Value of your customers then please get in touch and we can help.