So what's Customer Lifetime Value?
The Average Customer Lifetime Value is defined as the potential Dollar value, each of your customers contributes to your business over a given time that your customers are likely to do business with you. That means the average total value of each customer that buys from you.
Knowing the Average Customer Lifetime Value of your customers is crucial for determining how much time, effort, and money you can afford to invest to acquire that customer in the first instance.
Every marketing, advertising, and sales campaign that you undertake costs you money as well as increases sales, profit, etc. But how can you be sure that the benefits would outweigh the marketing costs or investments? Only your results from your marketing and sales activities can determine if it was a cost or a profitable investment.
Every customer costs you money to acquire, and we know that you may not recover your marketing cost from the first sale. That is where your Customer Lifetime Value plays a significant role in determining how successful you're marketing was, and on how much money you can spend on marketing and advertising. That’s why knowing your Customer Lifetime Value is so powerful. But customer lifetime value is not the only important metric, you also need to take the Customer Acquisition Cost into account.
"Buying Customers" means you can buy as many customers as you want, as long as every new customer is profitable. The only way you can know if a customer is profitable is by knowing how much they cost you (Customer Acquisition Cost), and how much profit you earn from every customer over their time that they support your business
Now you can buy as many customers as your business will ever need. That means you have an unrestricted marketing budget for your business (As long as you profit from every customer)
Using the sample above, suppose that you have a customer loss rate of just 10% each year. Therefore, a 10% attrition rate is costing you $60, 000 in potential future revenue each year.
Use this free Excel "Average Customer Lifetime Value" calculator to help you determine the average value of your customers. The calculator use 2 simple methods to calculate as seen in the picture below.
The customer retention rate is measured for a given period by dividing the number of customers the company had at the beginning of the period by the number of customers at the end of the period.
Let’s assume you have 100 clients who each spend an average of $3,000 per year in your business, and your customers deal with you for an average of 2 years. That means each customer has a lifetime value to you of $6,000 over a 2-year period. ($3,000 x 2 years = $6, 000)
That means on average each new customer you could acquire and keep is worth $6,000 in revenue to you. Using the sample above, suppose that you have a customer retention rate of just 10% each year. Therefore, a 10% retention rate is costing you 10 customers per year, or $60,000 in potential future annual revenue.