A common problem we see in a range of small businesses is their failure to calculate the lifetime value of their customers.
These figures should be seen as a priority when a business is looking to forecast their profits, provide a necessary evaluation on the amount of their business, or develop new strategies to re-target different demographics with new marketing campaigns. We want small businesses to realise that once they have established their business and begun to sell their products or service, they need to take time (potentially six months down the line) to consider the real value of their customers.
Before delving into the how’s of calculating the lifetime value of a customer, we would first like to outline the key benefits of this figure to the future of your business.
6 Benefits to Calculating the Lifetime Value of a Customer:
- Identify which customers generate the best profit margin for your business
- Replicate those high-profit customers through more targeted marketing
- Agree which product or service lines should be promoted
- Understand how much can be spent on marketing
- Determine if your pricing should be amended to ensure healthier profit margins
- Understand where to cut costs and investments that are not generating growth
Most businesses are surprised by how many customers are unprofitable when they create a “fully loaded” estimate of customer profitability. However, industries often shy away from this project due to its overwhelming nature, but we want to reassure anyone looking to take on this task that while it may take time, it can be made accessible with our guide to understanding the lifetime value of a customer.
The first and most important tip is to calculate the overall customer spend over the specific duration of time. We advise utilising a year’s worth of customer data to estimate the spend.
Work out the spend of your customers over one year.
Working out an individual’s contribution to a business is simple and should be a simple revenue calculation.
Work out your company’s expenditure per customer.
You must then determine the attributable costs of servicing the customer, the prices of the goods you offer and the service you provide them. (Don’t forget; rent, phones, insurance, staff costs etc.). On top of this, you will also need to consider the marketing efforts put into customer acquisition, whether this is through advertising, content or discounts. This should be calculated on a yearly basis and then divided by the number of sales that took place.
These costs to your business should then be subtracted from the overall revenue of each customer.
A word of warning, before subtracting from customer revenue, you should genuinely ask yourself the critical expenditures that have gone into a sale. While we have outlined the three primary attributable costs (the costs of goods, the service and average marketing spend), a range of other factors may be due to the customer’s purchase and should be considered. Every business is different, and whether you are providing a service or product, it is essential to take the time and, consequently, the money you are putting into each customer’s purchase, sign up or contract.
We work with a range of product and service based industries and understand that evaluating a customer’s value is essential to laying the foundations of business. From a marketing perspective, this calculation allows us to calculate precisely how much money we think you should invest in a specific marketing campaign, so it turns a profit. Any venture into PPC requires this figure to efficiently establish a budget, but the utility of this value is higher than its use in marketing; it will lay the foundations of how your business operates.
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