by Joy Gendusa, Founder of PostcardMania.com
In order to make intelligent marketing decisions, there are a few pieces of information that are “must-haves.” One of those pieces is the Lifetime Value of a Customer. This is a dollar amount you apply to your customers based on how much they will be worth to you over the course of your business relationship.
This number will cause you to realize that some decisions appear bad, when in reality they are VERY GOOD! For example, my company, PostcardMania, actually LOSES money on every first time order.
Wait. What? If it costs money to get clients, how do we make money?
The trick is in the Lifetime Value formula. Return On Investment (ROI) isn’t just what you make on the first sale. Even though we lose money initially, over the average lifetime of a client, we know we will make money — a lot of money.
Here’s how to figure out how much a customer is REALLY worth to you:
1. Know the Numbers
Start by gathering this crucial data:
A Average initial ticket price (how much they spend when they first buy from you)
B Average reorder ticket price (the average ticket price of a re-order)
C How many times they re-order from you in one year
D How long a customer is retained (5 years, 10 years, etc.)
2. Apply the Formula
Dust off your algebra book. Using the letters above, plug your numbers into this formula: A+D(BxC)=???
Initial Ticket Price: $500
Reorder Ticket Price: $99
Number of reorders per year: 4
Average # of years a customer is retained: 5 years
The formula will play out like this:
500+5(99×4) — Multiply 99 and 4
500+5(396) — Multiply 5 and 396
500+1980 — Add 500 and 1980
2480 — Finished!
The lifetime value of the average customer in our example is $2480. Now you have to figure out what it costs you to acquire a new customer and what you should be spending.
Find out the Lifetime Value of your customers with our Lifetime Value Calculator. All you do is fill in the blanks and our calculator spits out your answer!
For help figuring out how your customers’ lifetime value should shape your marketing, call my experts at 800-628-1804.