When it comes down to your customers, they each have a lifetime value. This value is important because it can help you determine just how much time and money to invest in acquiring a customer.
With this information, you can do detailed budgeting and marketing avenues scrutinised to check they are worth the spend.
So, What Is The Customer Lifetime Value?
The customer lifetime value is the average total revenue generated from a customer. This is normally calculated by taking the average spend of a customer per month and multiplying it by the average number of months (or years) the customer is with you.
For instance, if you run a subscription service that charges £50 per month and the customer will stay with you for roughly 12 months – then the customer lifetime value is £600.
When you are looking at irregular or non-set spending, the calculations can become more difficult but the principles are the same. Instead of looking at what each customer spends, you would take an average of what customers spend per month and multiply it by the average time the customer is with you.
How Can The Customer Lifetime Value Help?
The primary reason to use the customer lifetime value is to determine whether the amount you’ve paid to acquire a new customer (the customer acquisition cost) is sensible. Often this means checking that the customer’s value is far greater than that of the cost to advertise and sell to the customer.
So, in the example above, if the customer acquisition cost is £200, this would be 33% of the customer lifetime value. This might not be so bad if your company has limited overheads (i.e. software provider) however, if you are a retailer – this could be significant.
What Does The Customer Lifetime Value Not Tell You?
The lifetime value doesn’t include other costs associated with the customer’s time with your brand; for example, customer services, communications and costs for delivering products / services.
You could, in theory, include these; however, by calculating the average cost per customer over the lifetime and deducting it from the lifetime value to give a net customer lifetime value, or profit. This would be accurate for financial purposes but there is a significant aspect that the calculation doesn’t include –and those are the intangible benefits.
What Are The Intangible Benefits?
As well as the financial income from the customer there are also several other benefits that the customer can provide your business. These can’t be included in the calculation because there is generally very little monetary value placed upon them andthey are highly difficult to measure.
For instance, customers can contribute to the development of your product or service through their feedback. Any improvement to your product or service will increase the value of your company and hopefully your profit.
The communications that the customer has with their peers is also important; if you provide a good service and they tell everyone you then have a brand advocate. This will attract other customers to your brand and improve your reputation in the industry. The higher your reputation the better positioned you will be to grow.
Conclusion
If you know and understand the value of your customer over their time with your business you can readily determine whether your advertising routes and pricing strategy are effectively generating an income. Just be aware that this calculation doesn’t include the intangible that customers can offer through being a brand advocate.
At Tectona we can help you calculate and understand your customer’s lifetime; which means that you will know if you have correctly structured you acquisition strategy.
Contact the Tectona team today to take that first step to understanding our customers’ value.