How to Calculate Your Customers Lifetime Value

Jan 24, 2023 | Business Tips, Inbound Marketing, WordPress

Reading Time: 4 minutes
Kevin Fouche

How to Calculate Your Customers Lifetime Value

Posted by Kevin Fouche, Pixel Fish Director

Kevin handles the planning, design, launch and training of every website that Pixel Fish creates. He ensures that every website is highly engaging and aligned with our client’s goals. With over 20 years of design and web industry experience to draw upon, Kevin aims to pass on his knowledge to our clients and like-minded businesses wanting to grow their online presence.

We all love and value our business customers. But do you know your business’ actual customer lifetime value? Indeed, if you know how much every customer is worth to your business, then hopefully, it will change the way you treat them. Understanding your customer’s lifetime value is essential to knowing the value of every transaction in your business. Knowing the actual lifetime value of your customers will enable to plan your marketing more effectively and even refine your prices accordingly. Let’d dive into How to Calculate Your Customers Lifetime Value.

What is a Customers Lifetime Value?

It is the total amount of money a customer will spend in your business over time.  It takes into account the initial purchase, as well as any repeat purchases and additional add-ons that customers have made in the past (such as upgrades, additional services or products). By understanding each customer’s lifetime value to your business you can better plan and develop strategies for your campaigns, target the right groups of customers and price your products accordingly.

Once you understand and start to track customer lifetime value, it will help you make decisions on how to treat different segments of customers, when to discount and how much value each customer brings long term.

Why is it important to be able to Calculate Your Customer’s Lifetime Value?

It is important to be able to calculate your customer’s lifetime value because it helps you plan and develop strategies that are tailored to the needs of your customers. By understanding each customer’s individual contribution, you can better target the right segments of customers with specific offers and promotions that are more likely to result in repeat purchases. Additionally, understanding the lifetime value of a customer helps you to understand when it is worthwhile to invest in acquiring new customers, compared with nurturing existing ones. By tracking and understanding customer lifetime value, you can maximize your profits over the long term.  In conclusion, tracking customer lifetime value is an essential tool for any business that wants to maximize their revenue and profitability.

How to Calculate Your Customer’s Lifetime Value

ROI: Recurring vs Non-recurring customers

For example, let’s pretend you are selling shoes worth $100 and let’s also say it costs you about $50 to win every new customer (Through advertising, marketing, time etc.).

Knowing whether your customers are making just a one-off transaction or will be making recurring purchases can greatly affect the way you view your $50 cost to acquire each customer.

Scenario A: If that customer buys your shoes just once, then yes, their value is $100, and the $50 you have spent on winning them over can seem quite high.

Scenario B: However, if you know that one customer would be a repeat purchaser of your shoes, then over the next 5 years, they may very well be worth $2,000 to you. Now how does that $50 sound?

* A recurring business customer is almost always more valuable to you than a one-off customer. So make sure you consider the long-term value of each customer when deciding how much money to spend in order to win them over. On the other hand, a non-recurring customer type is someone who may only buy your goods once.

Calculate the lifetime value of your customers

Below I have demonstrated how you can efficiently work out the actual customer lifetime value for your business is. Make sure you are doing your figures based on new clients in one year.

Firstly split your customers into 2 types:

  • A: Recurring purchase customers
  • B: One-off purchase customers (Non-recurring purchases)

Then fill in your business statistics using the below example.

For this example, I have said that this particular business gets:

  • 100 x one-off purchase customers each year that spend $100 per transaction.
  • And also gets 10 x recurring customers each year who spend roughly 5 x $100 transactions and shop with the business for about 5 years. This gives the company a total Lifetime Customer Value of $35,000.

A: Recurring purchase customers

Average recurring purchase per customer: $100
Average purchases per year: 5
Average client lifetime: 5 years
Total purchases by customers over their lifetime: 25
Ave revenue per customer: $2,500
Number of your customers who are recurring clients: 10
Recurring Lifetime Customer Value: $25,000

B: One-off purchase customers (Non-recurring purchases) 

Average one-off purchase per customer: $100
Total purchases by customers over their lifetime: 1
The average revenue per customer: $100
Number of your customers per year: 100
Non-recurring Lifetime Customer Value:  $10,000

Total Business Customer Lifetime: $35,000

As you can see, understanding how much every customer is worth to your business can help you plan and market your business more effectively. You may realise that there is a certain sector of clients who are highly profitable over time due to their repeat spending. 

Top types of recurring customers

Top types of recurring customers include subscription box services, membership sites, and memberships to exclusive clubs. These customers are more likely to stay with your business in the long run and provide a steady stream of revenue. You can provide incentives that further encourage loyalty such as discounts or free shipping and use this information to craft marketing campaigns specifically aimed at these types of customers.

Top ways to keep your recurring customers coming back for more

The key to keeping your recurring customers is to provide excellent customer service and regularly update them on new products and services. You can also send out newsletters or promotional emails with special offers or discounts, create loyalty programs, offer rewards for referrals, and upsell related products when they make a purchase. Additionally, you should stay in contact with them regularly via email, phone or social media in order to build a connection and help them feel valued. Doing all of these things will not only keep your customers happy but also improve customer retention and  help you to maintain a steady flow of business.

You should also take the time to listen to your customers’ feedback and ask for their opinions on new products or services you are offering. This will show them that you value their feedback, which can help create a stronger bond between your company and their loyalty. Finally, it is essential to provide a high level of customer service. This means responding quickly to questions and concerns, providing helpful advice, and resolving issues in a timely manner. Taking the time to focus on your customers’ satisfaction will help them feel valued and more likely to continue doing business with you.

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