Lifetime Value of Customer

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     You have heard about the "Lifetime Value of a Customer." But, what will that do to increase profits?

Here is Money
     The hardest thing in marketing is making the first sale. After that, people tend to use the same store. If you set a very low price (even less than the cost of the product) for first time customers and make it easy for them to make first purchases, you can increase your customerbase. Then, when they return to buy from you, you will make more money off their subsequent purchases.

No Guess Work
     However, you can't just set super low prices and hope to eventually make a profit. Those special prices must be set based on how much money your average customers spend over certain periods of time. This will tell you how much money you should invest to gain new customers, and when you will begin making a profit from new customers. You can find out those numbers by calculating the "Lifetime Value of Customer."

Formula
     Here is the formula.

length of relationship * profit of each sale * number of sales / number of new customers

length of relationship
average length of relationship with customer
profit of each sale
average profit of each sale
number of sales
number of sales you have made in the past X days
[NB] "Number of sales" means numbers of transactions, not the number of products sold. If a customer buys 3 products at once, it is "1", not "3".
number of new customers
number of unique customers you acquired in the past X days

Interpretation
     For example, if you set "X days" to 365 days and you get $100 for the lifetime Value of customer, you will break even if you spend $100 to get one new customer (i.e. spend $1,000 for an advertisement, and get 10 new customers - $1000/10=$100) after 1 year. Or, if you spend $50 to get a new customer, you will make $50 on each new customer after 1 year.

© March, 2006



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