Lifetime value of a customer

September 24, 2012 — Leave a comment

A very important number in your business is the lifetime value of your customer.

The lifetime value of a customer is how much profit you’ll make from the average customer over the time they will shop with you.

Here is how to figure that out.

What is the average initial purchase they will make with you?

Subtract the expenses and you get the profit from the average customer.

How often do they buy each year?

How long will they stay with you? One year, three years, five years?

Always figure on the low end.

Multiply the profit by the years they will be with you and you’ll have the lifetime value of your customer.

Sample: Your average customer’s initial purchase is $50 but after expenses (Office, salary, your salary, advertising, cost of product, etc.) your profit per sale is $10.

They will buy three times a year. That is $30.00. An average customer stays with you 5 years so 5 times 30 equals $150 in profit after all expenses have been taken out.

So you could spend $149 to get a new customer and still make a profit. Don’t forget this isn’t taking into consideration the referrals this customer will be sending you over the five years. In fact you could lose money on the purchases a customer makes but make a great profit from the people they’ll be sending your way.

 

Jeff

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