Lifetime Customer Value
In my opinion, this particular section is the most important key to understanding your potential success or failure online. It’s really important, but it’s the part that everybody seems to want to overlook. So please do stay with me. I want to tell you from personal experience, that this is the part that most businesses fail on, because they’d sooner avoid the subject. It’s Lifetime Customer Value.
This all works on averages, and sometimes we lose people when we start talking about averages because, of course, no customer is average. Well guess what? That’s exactly the same in my business and it’s the same in your neighbours business. But if you don’t understand the core principles, then you can’t start to market yourself effectively. So, Lifetime Customer Value is absolutely key to your online success.
Let’s get into the numbers. How do we work this out? Well, if you were to take your turnover for the whole year and divide that by the number of clients you’ve had, you would find out, on average, how much each client spends with you. If you are already thinking “that’s not going to work for me, with my company, some of my customers spend very little and some of them spend a lot” then bear with me. This is just to work out an average.
If we take the turnover of a £100,000 over the year and say that in that year we had 10 customers, then each of those customers brought us £10,000 in sales. We’re going to keep the numbers really simple and say, what if our profit margin was 50%? Let’s say that you’ve worked out that with all of your costs of delivering that business and they’ve amounted up to £50,000 over the year. This is half of the £100,000 revenue and therefore it’s a 50% profit margin.
With your business, you might need to look at whether it’s gross profit or net profit. This does alter from business to business. So, I’m just going to use the term profit at this stage. If it’s £50,000 out of the £100,000 that is going to be used up in costs, then actually from the £10,000 each customer brings us, it is £5,000 profit from each customer.
It is important to understand that we need to look at the profit here. But of course, how long does that customer stay with us? Let’s say we’re in a relationship with them for 4 years and they spend, on average, £10,000 with us every year. Of course, out of the £10,000, we’re getting £5,000 in profit. In this instance, how much is the customer worth to us over the Lifetime? They’re worth 4 years of the £5,000. So the Lifetime Customer Value is going to be £20,000. So when you take on a new customer, they’re worth £20,000 in profit to you. That is the Lifetime Customer Value.
Of course, your numbers might be absolutely different to this. You may be thinking “£100,000 doesn’t sound a lot”, or you’re maybe thinking “wow, if only I was getting a £100,000″. But the principles that are still the same. So let me just run you through them. You need to work out what was your total turnover for the last period of time. It could be 6 months; it doesn’t need to be a year. What was the total turnover figure and how many months was it? Divide that by the number of clients you had in that period and it’s going to tell you how much each one contributed, on average, to that particular turnover figure.
Once you’ve worked that one out, you can then work out what they’re worth in profit by using the same period of time and the costs involved servicing those clients. Finally, for the last piece of the jigsaw, how many of those periods of time do you keep your customers for? That will tell you the Lifetime Customer Value. I’ve used some really simple numbers there so that you can understand it. What you need to do is start plotting out your numbers. The longer the time period is the better.
Remember, these are averages and if you work out the averages, you can then work out how much you can spend on attracting a new customer.