Why it’s important to understand your customers’ lifetime value.
Let’s say you spent $800 of your monthly marketing budget on paid Google ads, which helped you attract a new prospect. This new prospect becomes a customer who initially signs up for a $500 service, which means that if the story ends there, you’ll end up losing money.
However, if you can turn this one-time customer into a repeat customer who commits to nine more $500 services over the next five years, you’ll have more than made your money back.
Calculating the lifetime value of your customers gives you a clear idea of the ROI of your digital marketing, but unfortunately it’s an exercise that many small businesses completely neglect.
If you don’t calculate the lifetime value of your customers, it will be almost impossible to know what your real cost per acquisition is, and this can lead you to make unwise and unnecessary decisions regarding your marketing budget and strategy.
How do you calculate the lifetime value of your customers?
There’s a simple formula you can use to calculate the lifetime value of your customers:
The average transaction cost x the average frequency rate x the average number of years a customer is retained. For example, if the average cost of a transaction is $500, the average frequency rate is twice a year and the average number of years a customer is retained is five years, this means that the average lifetime value of your customers is $5,000.
Bear in mind that these figures are based on averages and are estimates only. There are also many factors to take into account, such as the percentage of regular versus one-off customers. But even if it’s only an estimate, it will give you a more accurate idea of your marketing ROI than a customer’s first transaction alone.
Increase your customers’ lifetime value by strengthening their loyalty
Marketing gets your name out there and attracts new customers, but if you want to turn occasional customers into lifelong ones, that’s up to you. Customers don’t come back because of marketing – although it can be useful to remind them that a company is still there – they come back because they are loyal to the service and/or products provided by the company.
Maximizing the lifetime value of your customers means creating strategies that increase their loyalty and keep them coming back again and again. This may mean redoubling your customer service efforts, or even reminding your customers that you’re there and ready to help via social media or email marketing.
Increasing the lifetime value of your customers not only pays for every marketing dollar you spend, but also builds loyalty, which can be very useful in attracting new customers.
Customers who are loyal to your company will not only trust you again and again, but will also be more likely to spread the word about your company than any one-off customer. Whether through Facebook comments, Google reviews or even in-person word-of-mouth, it’s a powerful resource for any small business.
