Last week, we talked about identifying the value of a LEAD. That is a baseline number to know to be able to take the next step in understanding the return on investment for your organization as it relates to sales and marketing efforts. When we are talking about the Lifetime Value (LTV) of a customer, we want to look beyond that first purchase and calculate the projected revenue. This is just one more way to evaluate your marketing and advertising strategy and manage your budgets.
Step 1: Find the average customer purchase per visit over a specific period of time.
This is as simple as looking at last years’ revenue generated per purchase. For that calculation, look at the total number of transactions over the last year and divide the total revenue from those transactions by the number.
- Example: If customer 1 spends $3.50, customer 2 spends $5.00, and customer 3 spends $6.50, the average is $5.00.
Step 2: Find the purchase frequency rate – how often each customer repeats a purchase.
For some of you, that may be once per year. For others, it could be weekly. Example: If customer one visits once, customer two visits twice, and customer three visits three times, the average is two visits per week.
Step 3: Determine the annual customer value.
This is where simple math begins to tell us a story. Take the average customer average purchase value times the average number of transactions within that same time frame.
- Example: $5.00 x 2 = $10.
- In this example, a customer spends $5 two times a week, so their customer value is $10
Step 4: Identify the average lifespan of a client.
Dig into your CRM or billing software and export your list of active clients. From there, add in a column that shows the length of time that client has been with you. Again, find the average.
You can, for this calculation to be more accurate, remove the top and bottom outliers.
Step 5: Finally, Calculate Lifetime Value.
There are several ways to calculate LTV, but this is most simple and typically provides a middle-of-the-road estimate.
- Example: (Customer Value) x (Average Customer Lifespan)
- For this example, let’s assume the average customer lifespan is ten years. This number can be found by closely tracking previous and current business.
- (52 X 10) X 10 = $5,200
- The average Lifetime Value is $5,200
Once you have taken the time to find this value, now we have real data that can drive insights and marketing.
- Are you happy with the Lifetime Value number that you calculated? If your answer is no, then work with your marketing team to identify and seek out new customers that better reflect your goals for LVT. Build a marketing plan that attracts your aspirational client values and change that outcome.
- This number can also help influence your marketing budget by helping to set the cost per lead or cost per acquisition goals for your team to be accountable to.
- We worked with one client whose business model had a $500,000 average LVT. Because of the overall value of that client and potential return to the company, they were willing to spend upwards of $300 per lead from completion.
- Likewise, we were working with a client that had an average of $160 LVT, so for their marketing goal, we knew that they could not exceed a $15 CPA.
- In both cases, this information allowed the business owner to set goals and limitations on their marketing plans and hold the agency accountable to a measurable goal.
In conclusion, finding the lifetime value of a client is a valuable component of your marketing strategy that will help you plan your marketing budget. If you need any further assistance with your marketing budget, strategy, or growing your business, our digital experts are ready and eager to help. Contact us today!