![Customer Lifetime Value](http://uploadedimages.womo.com.au/1038344.jpg)
What is a Customer Worth to You?
Do you know how much a customer is worth to you? It's not that hard to estimate and it's a key piece of information you need to make good decisions. Knowing the average lifetime value of your customers tells you;
- How much marketing your can profitably spend on acquiring a new customer
- How you and your staff should treat customers (it's not just about the transaction at hand)
- What you can (and should) spend on fixing a customer's problem in order to keep them
So how do you measure the lifetime value of your customers? Here's an easy way…
- Calculate or estimate your average order value
- Multiply this by the average number of times a customer buys from you per year
- Multiply this by your average profit margin
- Multiply this by the number of new customers each customer refers to you (per year)
- Multiply this by the average number of years each customer stays with you
For example, a hairdresser might find that;
- Their average order value is $70 (ranges from $30 to $200)
- Most customers come about 6 times a year so revenue per year is $420
- Profit margin is about 60% so profit per year is $252
- On average, each customer refers 1 new customer a year, so their value becomes $504
- On average, each customer stays for 3 years (before moving or changing salons), so their lifetime value is $1512
If this hairdresser runs advertising (or for instance joins Word Of Mouth Online's Happy Customers Program) for $500 a year, technically it only needs to deliver one (1!) new customer to make this a worthwhile investment. (Obviously the more the better and hairdressers typically get 50 new customers a month, but you can see the point.)
If you need an even easier way of calculating Customer Lifetime Value, try this;
- Take your annual revenue
- Divide this by the number of customers you served in the year (this incorporates customer referrals)
- Multiply this by your average profit margin
- Multiply this by the number of years each customer stays with you
![Money](http://uploadedimages.womo.com.au/1025807.jpg)
Understanding where the money comes from is key to making more of it!
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