Why Is The Life Time Value of My Customers Important?

Have you ever watched Shark Tank? The thing they are the most critical of is an entrepreneur who doesn’t know their numbers. So you have customers. You have sales. You know the cost of acquisition for each new customer. You even know how much it costs to create the product or provide the service and how much profit is created from each sale.

It goes without saying that you want to be able to determine how many dollars you are getting back for every dollar you put into a marketing channel or campaign. That’s business 101. That’s cute. You may be effectively measuring ad spend against simply conversion rates, but you’re still missing which campaigns are bringing in your highest value customers; the ones who repeatedly come back again and purchase.

If you’re in business, You already know that the real money is in delivering enough value so that customers will buy from you again and again. In the big picture when you’re estimating value of a customer per conversion, you will factor in things like repeat business, referrals/word-of-mouth, and lifetime customer value. When marketing online, and using channels such as AdWords or Bing or Yahoo, factoring in these values can give you the flexibility to bid higher on keywords or devices or even geographic areas while confidently bidding below your value-per-click.

So what is Customer Lifetime Value?

Very simply it is the sum of all the purchases a customer makes with you. For example, if a customer only makes one purchase for $20, that customer’s CLV is $20. If a different customer makes eight purchases, and each of those are for $150. That customer’s CLV is $1200. Because there are huge differences between the customers who purchases once from you, and the customer who purchases multiple times, you want to know who they are.

Ask yourself: Why do you think repeat customers come back? Should they be treated differently? My answer is a resounding YES. Not only treat them exceptionally well, but determine the costs to get them and do what it takes to keep them.

When you think about it, this is a very powerful metric to use in identifying the marketing campaigns or even in store employee behaviors or interactions which are bringing in your very best customers. This also illustrates what turns a one-time customer into a repeat customer or raving fan.

If you’re measuring ROI using first transaction only, your metrics will be skewed by customers who made an expensive first purchase or campaigns that brought in more customers. Let’s take a look at a fictional landscaping company named Walter’s Landscaping to illustrate how this works. This may help you get a good grasp of the concept. This will be a typical small company with a small budget to work with. So the year is 2015 and Walter is a start-up and doesn’t want to compete directly against other landscapers by leaving cards on residential homes. He doesn’t have time for that either. Someone told him to go direct with an online go to market strategy. His salesperson and partner also has a challenge finding leads or cold calling so, Walter uses AdWords to drive traffic to his site and increase phone calls and “More Info” sign ups. He is using Search, Display, Youtube and Remarketing to get his brand message out to highly targeted audience so he can have more time doing money making activities.

What do the conversions look like?

One Time Conversion Value for Walter’s Landscaping. He wants more of the higher end landscape designing jobs, and the info for those jobs are below:

• Average sale revenue: $2,000
• Profit margin: 25%
• Leads that convert to a contract: 15% (They need to work on their sales skills)
• Value-per-conversion (single sale): $75 = ($2,000 * 25% * 15%)

Factoring in the power of referrals / introductions / word-of-mouth

Walter’s Landscaping has hard data which shows that for each customer they typically gain 25% in additional business through referrals /word-of-mouth (because they ALWAYS ask for introductions from customers). Here’s how we factor that in:

• Value-per-lead (single sale): $75
• Growth from referrals: 25%
• Value per conversion (+referrals): $93.75 ($75 * 125%) – It’s 125 because it’s over and above rather than showing a loss of 25%…

Factoring in the life time value of a customer

Lastly, Walter’s Landscaping knows that each new customer makes repeat purchases worth approximately $5,000 in revenue over their lifetime. It’s easiest to factor this into initial deal value.

• Average contract revenue: $2,000
• Repeat business over lifetime: $5,000
• Profit margin: 25%
• Lifetime profit per customer: $1,750 ($2,000 + $5,000)*(25%)

Once we have the LPV, you can factor back in how many prospects convert to a contract and referral gains:

• Lifetime profit-per-customer: $1,750
• Leads that convert to a contract: 15%
• Growth from referrals: 25%
• Lifetime value-per-conversion: $328.12 ($1,750 * 15% * 125%)

So I could end the article here now that I answered the question of calculating the Lifetime Value of a Customer, and hopefully you know why it’s important. I want to dive deeper into the subject because very few businesses or marketers fully take the time to find this data, let alone capitalize on it. Here is a bonus:

How does this CLV information enable you to be more strategic with your bidding?
For the sake of the example, let’s say 5% of clicks on the ads convert to a lead. Here is the value per click:

• Value-per-click (single sale): $3.75 ($75 * 5%)
• Value-per-click (+referrals / assisted clicks): $4.68 ($93.75* 5%)
• Value-per-click (lifetime): $16.40 ($328.132* 5%)

Choosing your conversion value

Naturally, you want to use a calculation method that makes the most sense for your business and advertising and marketing objectives. Single sale conversion values can be useful when you want to maximize the immediate profit and know your customer acquisition cost. The Lifetime conversion values though can be even more valuable and useful because ultimately, you want to maximize long term growth of your business, right? When selecting and calculating a conversion value, it’s important to select the method that best aligns with your KPI’s or desired outcomes, such as a sale; which is really the only outcome that should matter for a business at the end of the day.

Once you are driving traffic and that traffic is converting to leads, you want to make sure those leads are converting to customers. This is where you determine the value of your leads and the value of your offer on your website or the skill of your sales team.

Sure you want to optimize the landing page with a strong and engaging call to action and content that is relevant to the keywords and the ad text. If your conversion metric is calls though, you want to make sure your attracting qualified leads and have skilled sales people to close the deal when they are called.

Measuring the campaign’s return on investment using the Customer Lifetime Value will take a little more energy and upfront work on your part, but does it make sense to know for sure that your optimization efforts will actually turn into positive business results rather than higher Click Through Rates (CTR) or Call rates which ultimately don’t turn into sales?

I hope this helps.