How To Calculate The Lifetime Value of A Customer or Client
There are two main reasons why you must know the lifetime value of your average client or customer:
- First, until you know how much each one of your clients is worth to you over the course of his or her patronage, you won’t go the extra mile to treat that person like a king or a queen
- Second, when you understand the lifetime value of your average client, you can figure out the optimal amount of money, time, and effort to invest on getting a prospect to become your client.
Because most businesses don’t know how much each one of their clients is worth to them over a period of years, they usually don’t invest enough resources to keep their clients for the long term.
By understanding the lifetime value of your average client, you will be head and shoulders above and beyond the competition. You can use the formula below to calculate the lifetime value of your typical client or customer.
(Please note: It’s extremely important for you to determine the lifetime profit value of your average client or customer. So do it before continuing to do any marketing.
If for some reason you can’t perform this calculation now, I recommend you bookmark this page, or print it out and use a memory jogger to remind yourself to perform this crucial exercise as soon as possible.)
Here are the questions you need to answer to calculate the lifetime value of a customer or client:
- How much is the average sale?
- How many times a year does the average person buy from you?
- How many years will the customer continue to buy from you?
- How many people will your customers refer to you?
Some customers are probably doing business with you once a year, quarterly, or several times a month or week. In my malpractice insurance business, my customers dealt with me once a year, when they renewed their policies. But I communicated with them at least three times a year to let them know that I was thinking about them.
Here is an example of how to calculate the lifetime value:
The Formula For Calculating The Lifetime
Value Of Your Average Client:
1. Average sale
|2. Number of sales per year (assume twice per month)||24|
|3. Average number of years a customer buys from you||10|
|4. Approximate number of referrals||5|
|5. Gross sales per year (multiply Row 1 by Row 2)||
|6. Sales over the life the customer (multiply Row 5 by Row 3)||
|7. Gross sales for total referrals (multiply Row 6 by Row 4)||
|8. Total value of a satisfied customer (add Rows 6 and 7)||
You can see how a $50 customer can be worth $72,000 before expenses. Even if your expenses are 10%, that still leaves you with a net profit of $64,800 per customer.
Some things to keep in mind:
- In this example, the number of referrals was quite conservative. Really happy customers will tell more than five people about your business.
- All of these numbers are based on doing nothing more than pleasing your customers.
- I hope you realize that an unhappy customer can cause far more damage to your business.
- In the example, how much was spent to get all that repeat business? Nothing more than pleasing them.
- Go out of your way to train your employees on the importance of pleasing your customers, and make sure that they do.
- Don’t ever allow any employees to be grouchy or treat a customer in any way but pleasantly. It will ruin you so quickly that it would be like a snowball rolling down a hill. Before you know it, you’re caught in the avalanche, and you’re dead.