How To Calculate The Lifetime Value Of Your Average Customer

One of the easiest (and most profitable) things you can do if you want to have a major advantage over your competitors is to know the lifetime value of your average customer. This is because the competition (most anyway) has no idea what their typical customer is worth to them.

Your competitors usually base their marketing and advertising budget on a percentage of sales?

This means that during a slower or weakening economy, the competition usually cuts their marketing and sales budget by a substantial percentage in order to conserve cash.

Therefore, if you continue to market during that period... you'll acquire their customers.

Because of not knowing what the lifetime value of their average customer is, your competitors won't spend the necessary resources to nurture the relationships with their customers. What that means is they'll end up losing a large percentage of their customers to you.

Why?

Because your marketing campaigns will provide a more visible alternative. Back this up with good service and you should keep them for life.

I know this may seem so simplistic, but it's true. If you look around your community, you'll notice there are a few companies that seem to have more business than they can possibly handle while others are struggling just to survive.

The Formula

A. Average sale =
B. Number of sales per year per customer =
C. Number of years customer buys from you =
D. Number of referrals from customer =
E. % of referrals that become a customer =
F. Gross Sales per year per customer (A x B) =
G. Gross Sales over life of customer (F x C) =
H. Referrals who become customers (D x E) =
I. Gross Sales from referrals (G x H) =
J. Total Value of Satisfied Customer (G + I) =.

A. Average sale - simply add up your the total dollar sales for a year and divide that by the total number of sales transacted.

B. Number of sales per year per customer - take the total number of sales transactions for a year and divide it by the total number of customers.

C. Number of years customer buys from you - since 20% of the population moves every year, this number may probably be less than 5 years.

D. Number of referrals from customer - how many people does each satisfied customer tell theirs about you? You'll have to guess this number, it is probably between 3 and 12.

E. % of referrals that become customers - the more compelling your Unique Selling Proposition (USP) is, the higher the percentage. It usually is between 20% and 70%.

To help you get started, lets work through an example. Fill in the blanks under the column marked "Your Business."

Remember to use an estimated average and keep in mind that some customers only buy from you (or use your service) once and others may buy five, ten or twenty times.

1. How much is the average sale ________( $10)

2. How many times per year does
the average customer buy? ____________   (24)

3. How many years will the average
customer continue to buy from you
(assuming you keep them happy?) _______   (5)

4. How many referrals will the average
customer generate for you? _____________  ( 6)

5. What percentage of those referrals
will become your customers? ___________ (25%)

Okay, now that we have the crucial information we need to calculate the lifetime value of your average customer. In the next exercise, we'll insert these numbers into the formula and see what number you'll get for your business.

The next step is to insert the numbers into our formula and get the following results.

Now, look at the number you've just calculated for your average customer again. Are you surprised that your average customer is worth that much money to you?

In the example business, the $10 customer is actually worth $3,000 in sales (over the course of several years).

Now you can see why you want to spend your valuable resources to keep your existing customers happy.

This shows why it’s crucial that you communicate with your customers on a routine basis in order to provide them a service that they won't find or get anywhere else. This will also ensure you are able to fully maximise the profits you can make from them over the next several years.

Just by doing this simple exercise, you will have a distinct advantage over your competitors and you'll achieve more profitable results