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Small Business Marketing: Determining the Lifetime Value of Your Customers

Aug 17, 2007
Determining a customer's lifetime value can harvest big dividends as you increase your business. However, if you are like almost small business owners, you in all probability have never computed the lifetime value of your customers and are thus giving up maximum income potential.

Do you acknowledge what the lifetime value of your customers is?

Do you acknowledge why discovering your customer's lifetime value is important? If you don't understand the answers to these two questions, read on.

Too many businesses see their customers as just a single purchase or possibly a single purchase plus one additional backend purchase rather than determining the lifetime value of their customers.

"Lifetime value is expressed as the total dollar value of your average customer over the entire period that they're likely to do business with you." - Bob Serling
So, how do you calculate the lifetime value of a customer?

Determining the lifetime value of your customers takes for granted that you have multiple items to offer to your customers. Backend sale items may be your own or some product for which you are an affiliate, but you must have multiple follow-on things (products to offer after the first sale) to sell so that your customers have multiple chances to buy from you.

If you have been in business for a while, first decide the average length of time a customer stays with you. Next take net profit you have made over this period of time and divide it by the number of steady customers you have.

For example, say you have been in business for six years. You look at your customer list and learn that on average, your customers continue three active years with you prior to falling into inactive status. During the past three years your total net profit has been $480,000 and your customer list numbers 1750 active customers.

To find the lifetime value of each customer, you use the following formula: Lifetime Value = Net Profit / steady customers or in the case above, it would be Lifetime Value = $480,000/1750 or $274.28

So why is this significant. Because, now you recognize that each new customer you get is worth $274.28 dollars to you over the average customer life of 3 years. Now you can estimate how much you can spend to get a new customer and continue to get a profit.

Now, let's see some examples of how we can use this information.

For the purpose of this example let's assume that you have an internet business with a website designed for selling your products. Let's further assume that you are running a Pay-Per-Click marketing campaign. You have calculated that one out of every hundred visitors to your site converts into an real paying customer. You have a keyword on which you are bidding 50 cents.. Which means that for each 100 customers you acquire through that particular ad you will convert one into a customer so to acquire that customer cost you $50.

[Note: If you are operating an offline business, the same principles can be applied to direct response advertising by replacing pay-per-click with a written advertisement that permits you to track your responses from that ad.]

Now let's say that the product you are selling at this website sells for $39.00. Many website owners would assume that the Pay-Per-Click campaign with this keyword was a failure, because, you just spent $50 to get a new customer who purchased a $39 dollar item. That's an initial loss of $11 for every new customer you gain by this campaign. However, taking the longer view, that $50 dollars actually earns you on average $274.28 for every new customer over a period of three years for a profit of $224.28!

Now, instead of being a failure, your Pay-Per-Click campaign can be looked at as a great success. Spend $50 and get $224.28 back. How often would you like to do that?

Selling to current customers is always easier than acquiring new customers. You already have earned their trust, they have already purchased from you and if the product or service they bought from you was of high quality and met all their expectations or if you over delivered, they will probably buy from you again. Satisfied customers are repeat customers.

So, if you want to maximize your profits, determine your customer's lifetime value and design customer acquisition campaigns that will skyrocket your total net profits rather than campaigns that consider only an initial sale.
About the Author
George Dodge owns Small Business, "BIG" Profits , host of Bob Serling's Master Marketing Course for Small Businesses that Can More Than Double Or Triple The Number Of New Customers Or Clients You Bring Into Your Business.
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