Successful Small Business Owners Know This Number – Do You?

Why Is Customer Lifetime Value Important To Your Small Business?

One of the key numbers you need to understand when developing a sales and marketing plan for your small business is the lifetime value of your customers.

This is the number that the most successful business owners track to laser target their marketing strategies as well as power their profit improvement programs.

Customer lifetime value is essentially the average net profit your business can expect to generate from each customer over the period they deal with you.

The higher the customer lifetime value; the more you may be willing to spend on winning new customers, and the more profit you will make from them over time.

You can calculate the lifetime value of your customers quite simply:

Average annual $ spend

x

Average profit margin

x

Average number of years they stay a customer

So as an example, if my average customer spends $1000 a year on products that generate a 25% profit margin and on average my customers stay with my business for 5 years, my average customer lifetime value is $1250.

Now that I know what my customers are worth to me, I can start to make some strategic decisions in my business.

I know that I can spend up to $1,250 in marketing costs per customer and still break even over a five year period. Of course my aim is to spend much less than that but at least I have a benchmark to aim for – perhaps I am happy to spend up to half a year’s CLV to land a new customer.

If that was my benchmark then I need to be spending less than $125 per new customer on my marketing initiatives. If I can achieve that result, my profit on the new customer in Year 1 will be $125, my profit in Year 2 is $250 and my profit over the 5 year life of the customer is $1,125.

That is a pretty good return on my $125 investment in marketing costs isn’t it?

Having set that benchmark, my goal is then to make my marketing much more effective to lower the average cost to sign up a new customer to less than $125 – thereby improving my profit margins.

How do I do that?

I need to measure the cost and results of every marketing strategy I implement and continuously look for ways to improve the conversion rate and lower the cost of winning the customer.

Once I know my marketing costs are well below the customer lifetime value, it doesn’t matter how much I spend on promotion plans. As long as my conversion rates stay high, I am making money on every dollar I invest to win a new customer. You can really scale your marketing efforts with this knowledge.

Understanding your customer lifetime value doesn’t just help your marketing strategies, it also gives you another target to aim for in your profit improvement process.

If you can increase the CLV, you will increase your business profit.

Look back at the elements of the CLV calculation and you will see exactly how you can improve your profit:

  1. Find ways to increase the average amount each customer spends in your business each year
  2. Find ways to increase the average profit margin on the products your customers buy from you
  3. Find ways to keep your customers buying from you for more years

So, if I can make improvements in my business model such that my average customer now spends $1,500 a year on products that generate a 30% profit margin and on average, my customers stay with my business for 10 years, my average customer lifetime value has now increased from $1,250 to $4,500.

Can you imagine the effect that would have on the bottom line profit of your small business? Simply amazing!

I trust you now see how important it is to know the customer lifetime value in your business, and how you can use that number to benchmark your sales and marketing strategies and to drive the profit performance of your business.

If you are looking for more guidance on how to improve profit in your small business, I suggest you have a look at my business coaching program that steps you through my 5 step system to achieving massive business growth.

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1 Comment

  • Noell

    Reply Reply January 22, 2014

    The business coaching can help to improve the quality of the work. And these coach can help to develop the skills in you. Thanks for sharing these informations.

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