Surprise! Your customers may be worth $1200 or more per year?
Knowing the lifetime value of a customer helps you estimate the volume of business you could expect from each new and existing customer.
Once you know how frequently a customer buys and how much he spends, you can budget reasonable dollars for marketing to existing customers and lead generation for new customers.
The simplest way to estimate lifetime value:
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
This is the average lifetime revenue of a customer. Some companies take this equation one step further and calculate the average lifetime gross profit or net profit of a customer.
For example, calculate the average lifetime value of a customer using the following assumptions:
- Purchases $50 per month.
- Customers stay with your company an average of 5 years
- Customer makes an additional purchase of $500 every year in addition to the $50 per month recurring revenue.
The average lifetime revenue value of the customer is:
$50*12*5 + $500*5 = $6,000 over the 5 year period or $1,200 per year
Depending on your company’s gross margin or net profit margin, you can multiply the $1,200 per year by these numbers to get you average lifetime gross profit or net profit value per year.
If your net operating profit is 12%, then the yearly net operating profit per customer is $144.
That might not seem like a large profit. However, if you have 1,000 customers that equates to $144,000 per year.
Discover how much your customers are worth…and take care of them so they stay!