This episode’s Big Idea – Knowing your Lifetime Customer Value

It is vitally important that you understand the Lifetime Value of a Customer. Knowing this valuable number will add motivation to help you finally develop and optimize a marketing system, it will be very helpful as you create a marketing budget to acquire a new customer, and it will greatly improve you customer service.

You must know the Two Parts of Lifetime Customer Value (LTV)

First you must know the customer acquisition cost

Basically this means, how much does it cost you to get a new customer?

Some people will say as a badge of honor that they don’t do any marketing or they don’t pay for advertising. I always say why not? Or some business will under invest in marketing, I must say, that is a big mistake. Once you understand the cost to acquire a customer you can make marketing decisions. Even if you just do referrals you still need to get the initial customers that will in turn generate referrals.

General way to calculate CAC is to take the total marketing cost spent and divide it by the number of new customers/clients. (This method doesn’t account for repeat customers, etc but it helps you gauge what you are paying to get a new customer)

The second piece is knowing your customer’s Lifetime Revenue

To calculate  the lifetime revenue of your customer you must take the average product price multiplied by the number of times you expect a person to purchase your product or service.

For example: I’m working with a client who has a daycare facility. Each child is worth an average of $175 week, $700 a month, and 8,400 a year in revenue. If the average child stays for 2 year each child is has a customer lifetime value of 16,800 before making any referrals.

Some of you are thinking I need to start a daycare business. But really, knowing your customer’s lifetime value can help you decide how much to spend in marketing campaigns. How much money would you be willing to spend to get a customer if you knew they worth $16,800 dollars to you in two years? How many times would you contact them to convert them, 1, 2, 15 times?

In this episode, I also explain tactics for how you can capitalize on knowing your customer lifetime value. Here are the three tactics to increase your Lifetime customer value.

1.Start to Measure the Entry point of You most profitable customers

2. Survey your customer to discover what characteristics of your business are enjoyed most by your most profitable customers.

3. Determine ways to extend the lifetime of a customer. Product extension.