This is the most important concept I’m going to discuss. Everything you do is predicated on this – so pay attention!
The lifetime value of a customer is the total profit that a customer brings to your business over the lifetime of your relationship with that customer.
So if you were thinking in terms of only one transaction – think of how much money you’re missing out on?
Calculating marginal net worth in your business
Step One: Determine certain figures for your own business. If you’re new – make a projection. Here’s an example:
- What is your ‘average’ sale? (Add total dollar sales for a year and divide that by the total number of sales transactions you completed or expect to complete.) Approx $3K average invoice value
- How many times a year does an ‘average’ customer buy from you? (Take your total number of sales transactions for a year and divide it by the total number of customers.)
- For how many years does an average customer buy from you? (Remember, 20% of the population moves every year, so this is typically less than 5 years, depending upon the nature of your business.) 4 years
- How many people does your average customer tell about you? (A major factor.) The most common average is between 3-12, but guess. Guessing average 2-3
- What percentage of these people actually become your customers? (Usually between 20% and 70%.) Guessing 20%
Step 2: Here’s the thing – the secret formula … What each customer is worth to you in cold hard cash!
Fill in the blanks below (using the numbers you calculated in Step 1, to find out precisely what each customer is actually worth to you right now.
- Average Sale = $3K
- Number of Sales per year per customer = 3.4
- Number of Years customer buys from you = 4
- Number of Referrals from customer = 1
- % of Referrals who become customers = 20%
- Gross Sales per year per customer (A x B) = $10.2K
- Gross Sales over life of customer (F x C) = $40.8K
- Referrals who become customers (D x E) = 0.2
- Gross Sales from referrals (G x H) = $8.16K
- TOTAL VALUE of Satisfied Customer (G + I) = $48.96K
Naturally you’ll need to subtract your fulfilment costs – but this gives you a pretty good idea of how much you can make.
To help you, I’ve created an Excel Spreadsheet with the formula – you can put in your figures and it spits out an answer!
You can access it here.
Your next steps…
Work these number our for your business. If you don’t have all the numbers, make an educated guest and start tracking from now on.
Remember, if you’re not tracking your figures, you’re flying in the dark, and this is the most dangerous place to be when you’re in business.
Need some tips and hints, by all means drop me an email at email@example.com, talk to you soon.