Why is your Customer lifetime Value Important?

You should stop focusing on the individual sales, and start thinking about the actual value that customers bring into your business for the whole duration of your relationship with them. We are sure you would agree with us that the ultimate goal is to always get a repeat customer, rather than sell a product or service to someone once and never see them again, so your evaluations should take that into consideration.

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The calculation for your average customer lifetime value is simple:

Average income from a sale
x Number of transactions per year
x Average customer retention time in years

For example, let's say you own a B2B telecommunications business, and that the average sale of one of your systems is £2,000. Your average client tends to buy one system from you every year, and stay with you for an average of 10 years. 2,000 x 1 x 10 = the lifetime value that each customer brings into your business is £20,000.

Want to dig a bit deeper into your numbers? Download our FREE customer acquisition cost calculator.

How to use it to grow your business

What does this have to do with generating more income for your business? It is what your income generation strategy should be based on. In fact, new business development should always be delivering 3x the customer lifetime value than what it costs in acquiring it. Therefore, for every pound you spend, you should get £3 back.

Let me explain. Let's say that you have a target of getting 10 new clients by the end of the year, each with an average lifetime value of £50,000. That means that the total target lifetime value you are aiming for is £500,000. If we use the 1/3 rule mentioned above, your cost of acquiring these new clients (including the salaries of your marketing and sales team, any software that you use, the printing of marketing material, hosting of the website, etc.) should not be higher than £166,666. This enables you to have a hefty return on your sales and marketing investment and grow your business sustainably.

If you are unsure how much you are currently spending on acquiring new customers, download our freecustomer acquisition cost calculator and find out.

Conclusion

Calculating your customer lifetime value and basing your budgets on it is the best way to ensure sustainable business growth for your company and that you are getting a return on your marketing.