Access bigger profits hidden in the ‘back-end’ of your business…
The lifetime value is the total profit worth the average customer brings into your organisation, over the life of his or her buying relationship with you.
Now almost all organisations throw the weight of their effort, time and investment into attracting and acquiring new buyers, and making a profit from them. They fail to recognise, and therefore shift the weight of their marketing effort, to the back end sales – making regular, additional buying opportunities available to their existing customers or clients. That is where the big money is in virtually all businesses.
By calculating you’re your customers’ typical lifetime value, then placing the emphasis of your effort on increasing lifetime value with back end marketing, you suddenly possess the knowledge and the means to accelerate the growth of your organisation literally by up to ten times, or even more.
Here are two examples of how to calculate Lifetime Value:
First, let’s say your average sale value is £200 pounds, with a gross margin of £70 pounds, and the average customer spends that with you twice a year, and continues buying from you for three years.
Your average lifetime value is therefore £70 x 2 x 3: £420.
Second example, here’s a business with a higher average transaction value, of say, £2,000. You make a gross margin of £1,200 and the average client buys once per year and keeps purchasing from you for three years.
Lifetime value = £3,600 (£1,200 x 3 = £3,600).
If you calculate your available marketing budget on either a fixed amount per year or a percentage of sales, say 10%, you disguise and limit your greatest growth opportunities. Why?
Well, with the first example, above, if each customer is worth £420, in theory you could spend £400 on acquisition marketing, per customer, and still make £20 pounds profit. I would never advise you do that, but you get the idea.
Your actual available budget for acquiring new customers is far larger than seems sensible on the surface, or that you thought possible, when you only take into consideration the value of one sale at a time.
It is only possible to realise the true potential of your business when you calculate the lifetime value of your average customer or client.