As a small business owner, you may be wondering if you should invest a few thousand dollars to acquire new customers.
Before you implement a marketing plan, it makes sense to figure out the anticipated Lifetime Customer Value (LCV).
Say that you spend money for acquisition and generally your customers stay with you for under a year. When they leave, you are forced to spend more to attract new customers. With such a high churn rate, spending a lot on acquisition may not be worthwhile unless you are selling a high ticket item.
On the other hand, if your customers remain for a reasonable period of time and you receive regular fees for your services, your initial acquisition investment can turn out to be well worth it. The lifetime value of your customers is a good way to find out.
To illustrate this point further, let’s compare a property management company and a pizza parlor. When a property management company acquires a client, that client is generally worth a few thousand dollars in profit, therefore they have a high LCV and should invest a substantial amount of money into client acquisition.
On the other hand, when a pizza shop acquires a client they’ll generally sell them a slice of pizza. A slice of pizza is definitely not worth as much as a new property for a property manager. Therefore, the LCV of a pizza parlor is much lower.
The Lifetime Value of your Customers
The Lifetime Customer Value is a marketing term for calculations that predict the net profit you will garner from your relationship with your customer into the future.
In other words, the LCV is the financial value of that relationship long term. Once you have that information, you can determine how much to spend on search engine optimization, Facebook advertising or other marketing channels for customer acquisition while maintaining a high return on your investment.
Knowing the lifetime value of your customer enables you to look beyond costs in the present to projected future profits. The LCV allows you to decide on the appropriate acquisition costs for new customers. Using the LCV can help you set the amount you are willing to spend per customer per advertising campaign.
The Basics of Lifetime Customer Value
Calculations for the lifetime customer value range from simple models to comprehensive analytics strategies. A simplified method includes anticipated revenues and forecasting how many months you will keep the customer.
You might also want to include estimations of the cost of doing business to deliver services, the cost of capital, and retention costs such as promotions, customer support and billing.
Easy Calculations for Lifetime Customer Value
Here are some easy steps to determine the LCV of your customers so you can decide how much to spend on your marketing campaign:
1. Determine your Revenue per Client: The Revenue per Client is a total of all your annual fees per client. This includes application fees, service fees and any other revenue you get from your customers.
Divide this figure by 12 to get your revenue per month.
2. Calculate the Average Months Managed (AMM). The AMM is the average number of months that your customers stay. Add up the number of months that all of your clients have been with you. A customer who has been with you for three years has been with you for 36 months.
NOTE: Do not include any account that has been with you for less than a year, since this will tend to throw off your calculations.
3. Figure Out the LCV. The lifetime value of your customer is determined by multiplying the Revenue per Client x the Average Months Managed.
RPC x AMM = LCV
Using average figures, if your Revenue per Client = $200, and your Average Months Managed = 48, calculate the LCV as follows:
$200 x 48 = $9,600
Based on this example, the Lifetime Value of your Customer is $9,600. Now you can make an informed decision about how much to invest in marketing to attract new clients.
If the amount of monthly revenue your clients are likely to produce, the anticipated length of time they will stay, and their lifetime value is around the figures in this example – $9,600 per customer over 4 years – is it worth it to you to invest a few thousand dollars on marketing for client acquisition?
Looking at the LCV can put your marketing costs in an entirely new light. As long as you are able to spend less money to acquire a client than the amount of profits a client will generate, you will be profitable.