How To Determine The Lifetime Value Of A Customer

Do you know how much a customer is worth to you?

If you’re like most business owners, you probably have a vague idea, but have never sat down and tried to figure it out.

Why is it important to know how much a customer is worth to you? Well for one, it helps you realize the dollar value of a customer. You may not blow off that ringing phone next time if you knew the person on the other end was potentially worth $1500 bucks to you.

How do we calculate the value of a customer?

It’s actually pretty easy to get a quick calculation. Bear in mind, not all customers are created equal……some are much more profitable than others, so it may make sense for you to segment your customers into different profiles to determine different values.

#1 Determine the average sale per client in dollars. A simple way is to add your total sales from a specific time period and divide it by the number of purchases made. Ex: $100 in revenue produced via 10 sales would average out to $10 per customer.

#2 Determine approximately how many purchases a client will make in a given year. If you don’t keep track of this stat, you may have to make an educated guess. Ex: A customer makes approximately 3 purchases every 2 years. The average purchase # purchases per year would then be 1.5 per year

#3 Determine how many years a customer will stay a customer. On average, how long does someone remain a customer with you, 1 year, 5 years? Once again, you may have to take an educated guess here if you’re not keeping detailed customer records.

Once you have these 3 numbers, simply enter them into the calculator below to determine the lifetime value of a customer. That’s it! Like I stated earlier, not every customer is equal and you may have different price points and purchase patterns for different products and services. The solution is to segment your customer and offerings and run these calculations separately for each one. You may find that certain customers are far more valuable to you than others…..but you give the same amount of attention to all of them.

Have questions, tips or comments? Leave them below, you you can contact me privately here.

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Gary Shouldis

Chief Marketer at 3Bug Media

Gary Shouldis is a father, husband, business owner and blogger. He is the founder of 3Bug Media , a web marketing company that helps small business owners and service professionals get found online. You can give him a virtual high five over at Twitter or on Google Plus