How To Calculate Lifetime Value of a Customer
In recent weeks this has come up a few times with customers and I thought I would share a resource here for everyone else.
When end setting up analytics to help run your business we want to figure out where your customers came from and what they did on your site to help make improvements to user experience. Another important metric is the cost of acquiring that customer. Do you know what that number is? What is the cost of each lead that comes to your site? What is the conversation rate of purchasing your product or filling out a form?
When end we have that information, it’s just data and isn’t truly valuable until you know the lifetime value of a customer. If your customer is a one time purchaser it’s relatively easy. We will need to average your annual sales by number of tranactions
Let’s assume your average transaction is $100, and your operating on 30% margin then you net $30 per transaction. We find out your conversation rate of lead to purchase is 10% – or 1 out of ten visits will buy. Next we figure out each lead in your PPC campaign costs $10. That means that it costs you $100 and you only make $30. That is no good. We either need to figure out how to pay less per lead or get your customers to more profitable items.
Don’t stop now!
If you stop there you may be making a mistake. How many of your customers become repeat buyers, how many will refer your product to others? If you have a monthly subscription, what is the average length of time you retain customers? Is it six months? Do you look at customers like an annuity? If your customer buys monthly at that same rate, the value of that visitor changes dramatically.
Assuming the same numbers as before, you’d make $30 per month and your act customer is with you for a single annual contract resulting in a value of $360. Now that cost of acquiring the customer for $100 isn’t so bad anymore.
Every business is different and these aren’t easy numbers to figure out if you’ve not been set up to collect these numbers in the past. It will take some effort and it is worth it. You’ll be able to start making better business decisions based on the numbers. What you can measure you can manage.
More information here: How To Calculate Lifetime Value