August 10, 2017 by OSYB Staff
Small Business Profit Explosion shares why it is important to know your customer’s lifetime value. Your customer’s lifetime value will directly affect how much you spend on keeping your customers and how you and your staff will treat them. A customer’s value is not based on just one transaction, you should also consider the average amount that they will spend on your product/service for a year, how many years an average customer stays with you, and how many referrals a happy consumer can bring.
So let’s say that you have a small business selling art and a customer makes 2 purchases a year for a total of $200/year. But that same customer, refers 5 other people who may make $150 or more purchases a year. The average length of time customers purchase from you is 5 or more years.
- That customer that made the initial purchase’s lifetime value could be calculated as:
- Customer purchase $200/year for 5 years : $1000
- 5 referrals at $150/ year for 5 years: $ 2250
- Your initial customer’s lifetime value is: $3250
The very same customer has 2 very different values. Will you valuate your customer as a one-time or a lifetime value? Which value makes the most sense to help you determine how much of your customer services resources you should expend to keep your customers satisfied and loyal?