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Marketing Insights Question: Calculating the lifetime value of your customer

December 12th, 2011 · 4 Comments · Business owner/leader stuff, Sales, Strategy

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What is your customer worth to you?

Over the next few weeks, as we head towards 2012, I want to get you thinking about your business in a new/fresh way.  I’m going to ask a single question in each post — but I’m warning you, these aren’t slam dunk questions.

I’m hopeful that as you ponder my question — it will give you some ideas for making 2012 a break out year for your organization.  If nothing else — this exercise should fine tune some of your marketing efforts.

What’s a customer worth? I’m always surprised when people don’t know the answer to this question.  If I said to you “for every $100 you give me, I will give you a client” – is that a good deal for you?  How about for every $1,000?  $5?

The truth is, most business owners have no idea what a customer is worth to their business.  If that’s the case – how do you know how much you can afford to spend to get one?

Why does this matter?  What kinds of decisions do you think you’d make in terms of acquiring new clients if I told you that over the lifetime of your relationship, every one of them is worth $500 in profit?  How would your choices change if I said each one is worth $10,000?

How do you figure out the lifetime value of a customer?

You need to know this number.  (Want to bet that your ideal customers are worth a heck of a lot more than your so-so customers?)

Not sure how to calculate the lifetime value?  Check out this great infographic (from kissmetrics)which does a nice job of modeling how you can get a good ballpark figure.

Once you know that….you know what you can do to earn a customer.  And what it costs you when you lose one.

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Lifetime value of a customer infographic

 

Stock photo courtesy of BigStockPhoto.com

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4 Comments so far ↓

  • Melissa Khodai-Burkheimer

    Hi Drew,

    Thank you for sharing this. I’ll definitely add this to my list of things to do before the new year starts. I’ve enjoyed reading (and learned a lot) from all of your posts about getting ready for 2012.

    Thanks,
    Melissa

  • Seth Sparks

    Many textbooks fail to tell this story as easily as the graphic does. When talking acquisition campaigns with clients, LTV is the logical place to start. Paired with some capacity analysis and an understanding of your existing customer segment profiles, your growth and profitability decisions get much easier.

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