How to Calculate Your New Customer Lifetime Value

How to calculate your average customer lifetime value

 

Do you know what a new customer is worth?

It’s the price of what they purchased, right?

Wrong!

See, we all know, some customers buy once. While others buy from us many times.

Problem is…

When you run a marketing campaign – You can’t choose which customers buy from you and when…

I’d be great if only those who bought many times became new customers.

But, this isn’t reality….

For this reason – it’s important you know your NEW Customer Lifetime Value (CLV).

Then you’ll know how much you can afford to spend to gain a new customer.

OK, let’s break down the numbers to explain…

Imagine you had 10 new customers. Each sale made was worth 100 dollars.

Below is how often each individual customer bought over the next 12 months (X = sale)

1x

2x

3x

4xx

5xx

6xx

7xxx

8xxxx

9xxxxx

10xxxxx

10 customers

26 sales total

This gives you an average Lifetime Value of 2.6 sales per new customer or revenue value of $260.

 

Knowing this. Will allow you to track any new sales based on their Average Lifetime Value to your business…

…and, not get caught up in the ‘one-off’ transaction trap.

“Why is this important?”…you ask.

If I use the above example…

The first 5 customers only bought 7 times.

If you were tracking each sale on the transaction value – a ‘one-off’ sale.

You might stop the campaign early and cut your losses…

…leaving you with a negative ROI on your AD spend.

Worst still, you’d miss the next 5 customers – who went on to buy 19 more times.

See, by knowing your customers Average Lifetime Value…

It will help allay any stress if your marketing campaign doesn’t fire from the start.

Now, let’s go even deeper – and uncover the real average lifetime value…

See, on top of the ALV of your new customers – you’ll also need to consider any referrals.

Using the example above, if 2 of your 10 new customers – referred another customer to you…

You’ll need to factor this into your new customer lifetime value.

OK, let me explain…

Often, referred customers will spend more with you than cold customers. Because you’ve already built trust through their referrer.

So let’s look at the same process with 10 new referral customers…

…and we’ll assume each referral makes one extra sale.

1xx

2xx

3xx

4xxx

5xxx

6xxx

7xxxx

8xxxxx

9xxxxxx

10xxxxxx

10 referrals

36 sales total

That’s an average Lifetime Value of 3.6 sales per referral or a revenue value of $360.

 

Now, considering your new customer Average Lifetime Value is $260 –

And 2/10 new customers refer 2 people to your business with an average lifetime referral value of $360…

For a total of $720 in referral income from every 10 new customers

This adds an average value of $72 to your 10 new customers…

Bumping your Average Customer Lifetime Value up to $332

TIP: Track referrals and new customers separate. You should have a different strategy for growing referrals as you do for new customers.

So, if you’re making an average of $332 per new customer – over their lifetime.

This means if your cost per acquisition is less than $332 you are making a profit on each sale.

By knowing your customer lifetime value…

You can outspend your competitors to get a new customer.

And, still, make a positive ROI on recurring business…

It works because – Your competition will be tracking their AD spend based on a ‘one-off’ sale basis.

Meaning they need to make their budget work on up front ROI. – Using the above example 100 dollars revenue per sale.

You could assume your competitors budget for getting a new customer has a limit.  Most businesses can only spend 20 – 30 percent of revenue to make the sale.

So, if your competitors can only spend $30 to win a customer – imagine if you could spend $90.

You could invest more in your initial offer to wow your prospect’s to win their business. Confident you’ll make your profit back in future transactions.

This strategy is  –“giving away part of a profit, you would never have had”

Because, if you didn’t sacrifice the profit up front. You’d never get the back end recurring revenue from that new customer.

Even if you acquired the new customer at an initial break-even or worst case – a small loss.

It’s OK. Because you know you can make up the profit on the back end.

This puts you in the position of being able to create powerful initial offers for your prospects….

…Which your competitors will be unable to match.

…Blowing their marketing out of the water.

 

IN CONCLUSION

Understanding your customers Average Lifetime Value. Will enable you to outbid your competitors for new business. It’ll also help you stay relaxed if your marketing campaigns don’t start well. How have you used your customer ALV to boost your initial offers?

About The Author

Marcus Jovanovich

Marcus Jovanovich is a Marketing Coach and expert when it comes to online conversion and lead generation. Having run several successful traditional ‘bricks & mortar’ and e-Commerce businesses over the past 15 years, Marcus is now a sought after marketing coach and mentor for those wanting to grow their businesses by focus targeting all aspects of business marketing.

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