Customer Lifetime Value
Understanding your customer Lifetime Value (LTV) is important for any small business because it clearly defines the importance of maintaining an ongoing relationship with each customer. Unfortunately, many businesses have never calculated this, so when a customer is lost, it’s typically just looked at as one lost customer. This perspective fails to account for the overall revenue loss impact.
Measuring Lifetime Value
Just like ROI, there are a different ways to calculate LTV, but below you will find one of the easiest and most common. To get started, you’ll need to define a few items:
Customer Lifetime (traditionally measured in years): How long will a customer continue to provide revenue? While some businesses may be a “1-time only” business, most can hope for repeat purchases from each customer.
Average Annual Value (depending on the business, this could be measured in months): How much revenue does each customer generate in a given time period?
Retention: What percentage of customers continues to purchase, versus what percentage fail to return?
Lifetime x Avg. Annual Value x Retention % = Lifetime Customer Value
YardPlus is a local landscaping company with a business focused on weekly maintenance.
Lifetime: The average customer has been using YardPlus for 7 years.
Average Annual Value: 35 visits per customer each year at $15 per visit
35 x $15 = $525 annual value
Retention: On average, YardPlus is able to retain 60% of the new clients they obtain.
LTV: 7 years x $525 annual value = $3,675 x 60% retention rate = $2,205
In calculating ROI for their marketing efforts, for every new customer conversion, YardPlus can count on a $2,205 lifetime value. On the other side of the coin, for every customer not retained YardPlus is losing $2,205!
Impact of Customer Retention Mailers
Let’s say YardPlus begins a customer retention mailer every other month, and by doing so improves their Retention level from 60% to 75%. This would increase the LTV from $2,205 to $2,756. If YardPlus has 80 clients, that’s an increase of $40,000 in revenue over the average lifetime of 7 years. Sending a postcard every other month to this customer base over 7 years would cost just over $2,000. That’s a tidy return of $38,000!
Impact of Customer Referral Mailers
Now, let’s evaluate the impact of doing referral-based mailings to your existing customers. If YardPlus mails to their 80 customers once a week over two months advertising their new referral program, the cost of sending postcards would be $384. 5% of their customers refer a neighbor, generating 4 new customers.
4 customers x $2,205 lifetime value = $8,820
In evaluating the value of a marketing effort, a business should look at both (1) the ability of prospect mailings to attract and convert new customers and (2) the potential for customer retention mailings to increase the Lifetime Customer Value. Understanding Customer Lifetime Value is a powerful metric to help you stay focused on where your revenue is coming from and the impact of not maintaining an ongoing marketing effort.