Calculating the Value of a Customer

By January 12, 2018SEO Tips

Despite a steady stream of customers, and feeling as though business is on the up and up, you look into your finances and find your bottom line in the exact same place it was last year. How can this be possible?

One thing to look into is your ability to retain customers, rather than simply getting new customers. Businesses have found that despite how much financial attention is spent to obtain new customers, in the long run it is significantly wiser, fiscally, to retain your customer base rather than depend on a new customer base to raise that bottom line. Did you know that it can cost anywhere from 5-25 times more to obtain a new customer rather than simply retaining a pre-existing one?

Also, have a close look at who exactly your business is targeting. If you are targeting the wrong customer base, or you have ‘poor customer acquisition strategies,’ ultimately you will have a customer base that does not fully comprehend the purpose or value of your business and what you are offering. A customer who doesn’t appreciate your value, will not be retained.

Additionally, have a look at customer satisfaction. Despite your ability to get new customers in your front door, is your business lacking something that does not have customers coming back over and over again?

In order to quantify why that bottom line isn’t budging, we can calculate the Lifetime Value of your Customers. Perhaps overlooked in its potential benefit, this calculation can quantify just how much your customers are worth, giving valuable insight as to the overall well being of your business and aid you in enlarging and retaining your customer base.

Did you know that it can cost anywhere from 5-25 times more to obtain a new customer rather than simply retaining a pre-existing one?

A Better Understanding of Customer Relationships

Retain, Retain, Retain

Simply put, Customer Lifetime Value allows your to quantify the value that customers have provided to your business throughout the duration of your relationship together. It can also shine light on other aspects of your business that you may not have been consciously aware of. For example, the Lifetime Value of your customer is directly correlated to overall patient satisfaction, which is directly correlated to customer retention. And did you know that a satisfied customer will spend 31% more on new offerings, which they are 50% more likely to try if they are happy and satisfied with your services?

In addition to other marketing strategies, for example, churn rate, a Customer Lifetime Value can be used to predict future demands, potential revenue and further business possibilities.

Marketing DNA

Customer Lifetime Value can be likened to the “north star” of marketing strategies,- a compass which can help increase the longevity of your business, and raise that bottom line by identifying which customer group to target the most in content marketing. This value allows you to better develop an ideal customer profile. If we consider Pareto’s Principle, we know that 80% of our revenue will come from only 20% of our customers. Customer Lifetime Value will help you maximize your acquisition spending and maximum monetary potential by being able to accurately identify these specific customers.

How to Calculate your Customer Lifetime Value

Customer Lifetime Value is calculated based on specific business models, ranging in degrees of complexity based on customer behaviors and varying business factors. There are three variables to be considered when calculating your Customer Lifetime Value, and these variables need to be referenced within the same time frame (i.e. week, month, year etc.)

1. Sale Value:

Sale Value is essentially the profit generated after a sale. For example, the price of a subscription to your services or the average price of an order, ensuring that you differentiate between businesses that entail a contract, vs non-contractual businesses.
A subscription based business will need to factor in the average length of contract customers are allowed to enter into.

Sale Value equals Average Profit (average order value)

A business which focuses on a product however, will need to include frequency of product purchase and repeat purchase history.

Sale value = Average Profit (average order value) x Number of Purchase transactions

2. Customer Lifetime:

Customer lifetime takes into account how long a customer has been in business with you. These figures can be accessed from your CRM platform if your business utilizes CRM for data storage. However, customer lifetime can also be determined using your businesses ‘churn rate.’ Churn rate, or ’turnover rate’ refers to the percentage of customers that have discontinued their relationship with you. If you churn rate is less than your growth rate, your customer base is growing. Churn rates can be calculated by using the following equation:

Number of customers who have discontinued their relationship with you each time period (week/month) / Number of customers at beginning of time period (week/month) = Monthly Churn Rate

Thus, we can deduce that the customer’s lifetime is:
Customer Lifetime (in months) = 1 / monthly churn rate

For example: if you had 200 customers in November and 13 decided to end their working relationship with you, your monthly Churn Rate would be 0.065 (13/200). And your Customer Lifetime would be 1/0.065 = 15.38 months.

3. The Cost of Acquisition:

The amount of money it costs to acquire a new prospective customer is known as the Cost of Acquisition. As a general rule, the cost of acquisition is determined by looking at your monthly marketing spending and divide that by the number of new customers acquired.

Monthly amount spent on marketing / number of newly acquired customers = Cost of Acquisition

Customer Lifetime Value:

Now, lets put it all together. Once we have gathered all of the above amounts, we can finally determined our Customer Lifetime Value.
Value of a Sale Customer Lifetime – Cost of Acquisition = Customer Lifetime Value

It costs $250 for marketing metrics to acquire a new customer. In one month, that customer provides an average profit of $800. In the month prior, 3 customers churned out of 45.

Churn Rate = 3 /45 = 0.067

Customer Lifetime ( 1 month ) = 1 / 0.067 = 14.9

Customer Lifetime Value = (800$ x 14.9) – $300 = $11,620

Customer Lifetime Value is a powerful tool to quantify profit across all aspects of customer/business owner relationship. To maximize your ROI, apply the Customer Lifetime Value to varying customer bases to accurately quantify their value generated for your business. Customer Lifetime Value will ultimately allow you to:

  • Improve overall patient satisfaction and retention
  • Decrease churn rate
  • Predict future demands and profit
  • Retain better customers that perceive higher value in your business
  • Increase bottom line profit

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