The concept used to determine the lifetime value of a customer is based on using statistics to determine what you will earn as far as a total profit from the average customer. This method is precise enough to track the number to the penny and is something that needs to be addressed anytime you are looking to acquire more business.
The lifetime value of a customer refers to the amount of both profits and revenue a business owner expects to receive from a particular customer throughout their business relationship with them. You will want to keep several ideas in consideration; including the amount you can logically spend to acquire the client. This amount will play a determining role in the leads that will be generated, and any marketing decisions will help you pinpoint exactly where to focus your efforts concerning marketing, reduces the risk of unnecessary and costly mistakes, and will result in a more predictable cash flow.
Our main objective is to teach you a formula that will produce accurate numbers regarding the lifetime value of a customer. We have produced three separate formulas which will assist you with determining the lifetime value.
The first formula looks at the price of the service or product your customer is going to be purchasing. You then will figure how many times each year the customer will be making the purchase and how many years they will be doing business with you. This is considered the lifetime revenue. Say, for instance; your customer will be making a $100 purchase. They will be doing this four times a year, and you expect to do business with them for a total of 5 years. This would produce a lifetime revenue of $2000.
Next, you will want to look at the lifetime cost of goods you will have to provide for your customer’s needs. If the product you are selling them cost you $10, with a purchase four times a year during a five-year span would put your cost of goods for the customer at $200.
By using these two formulas together, you will be able to calculate the lifetime profit of the business relationship. By subtracting the $200 cost of goods for the five-year span from the lifetime revenue of $2000, create a profit over the lifetime of the business relationship of $1,800.