Do You Know How Much Your Customers are Worth?

Dec 27, 2019

WHAT IS CUSTOMER LIFETIME VALUE?

Customer Lifetime Value (LTV) is one of the most critical metrics for a business, yet only 32% of local businesses say they know how much a customer is worth to them according to our 2020 State of Local Online Marketing Report. 

So, what is Customer LTV? 

The LTV of a customer is simply, on average, how much a customer spends with you over their lifetime with your business.

WHY SHOULD YOU CARE?

Often we look at the immediate sale a new customer brings in, rather than understanding the full value of that customer over time.

But this is short-sighted.

The long-term view of LTV can not only change how you measure the SUCCESS of your marketing, but it can empower you to do MORE marketing to grow your business.
 

HOW TO CALCULATE A BASIC LTV

There are three key metrics needed to get an idea of your customer's lifetime value.

  1. The average amount a customer spends per purchase = A
  2. The average number of times the customer will purchase per year = B
  3. The average number of years your customer does business with you = C

       Calcuate: A x B x C = LTV

Let's use a dance studio as an example.

  1. The average cost of a 6-week dance session is $150 = A
  2. On average students take 4 dance sessions a year = B
  3. The average number of years a dancer stays with the studio is 4 = C

       Calculate: $150 x 4 x 4 = $2,400 LTV

5 BENEFITS OF KNOWING YOUR CUSTOMER LTV

Now that you have a basic understanding of that number, you may view your marketing in a different way.


1. Determining Success of Campaigns ๐Ÿค”

Often when we consider how well a promotion did we look at the immediate value or revenue of a customer and not the lifetime value.

For example, let's say the dance studio owner spent $4000 to get the word out about a 25% discount on their upcoming dance session, and the campaign brought in 10 customers.

In calculating the success of the campaign, the dance studio owner may look at it this way: 10 customers each purchased a dance class at a 25% discount at $112 per session. With 10 new students that promotion brought in $1120. The owner may think the promotion was a flop and she lost money.

But if she's looking at the lifetime value of that customer, over time, that campaign will bring in approximately $25,000, and was a huge success.


2. Better Budgeting Future Marketing Dollars ๐Ÿ’ต

Understanding this number can help better understand what your business can afford to spend on marketing by understanding the longer-term investment rather than only focusing on the immediate pop of revenue a promotion may bring in.


3. Understanding the Overall Health of Business ๐Ÿ“ˆ

Keeping tabs on the LTV is also a good way to understand the overall health of your business. If that number is staying the same or increasing year over year, you’re heading in the right direction. If you notice a dip, it’s a cue to take a deeper look at why that might be happening.


4. Greater Focus on Retention vs New Customer Acquisition ๐Ÿ“Œ

Once a business better understands its LTV, there’s generally a deeper sense of how valuable current customers are. It’s always important to acquire new customers, but there’s often a shift to also emphasizing customer retention. It’s a lot less expensive to retain existing customers than bring in new ones.


5. Ability to Increase LTV and Bring in More Revenue ๐Ÿ™Œ

When you know your LTV, you can improve it! And the more you're able to increase it, the more revenue your company will be making simply from your existing customers.

So get those calculators out and give it a try!

You'll be able to plan better, spend smarter, outsmart your competition, and grow more in 2020!   

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