Building Lifetime Customer Value
After working with CEO’s and business owners for over 10 years, I can say without reservation that one of the most consistent challenges facing my clients has been lead generation and new customer acquisition. You might remember the term Lifetime Customer Value (LVC) from Business School. LCV is an extremely useful piece of data. I’ll touch on three things in this article - what is LVC, how do I figure out my product or service LVC, and how can it help improve my bottom line?
Yes, wipe the sleep out of your eyes! Lifetime Customer Value can tell us a lot about where our business currently is, where we are going and more often than not, how to achieve forecasted growth and margins. So, what the heck is it? First off, you’ll need to calculate a product or service life cycle (how long a customer is likely to do business with your company) before we can get a handle on LCV. Let’s say you have a total of 500 customers and they typically tend to do business with your company for 2 years (life cycle). Over the course of those 2 years the company recorded a total net revenue 1.5 million.
The Lifetime Customer Value would be calculated as: $1,500,000 / 500 = $3,000.
$3,000. Each new customer acquired is worth $3,000 to your business. Definitely a number we should have in mind before heading into an appointment or making a call! The metric is valuable because it indicates the approximate net revenue from each new customer, but LCV is also a strong indicator of how much your organization can allocate toward new customer acquisition and remain profitable.
Knowing the Lifetime Customer Value associated with each product or service you provide is precious from a marketing and advertising budget perspective. Every campaign has a resource cost associated with it, and expectations for results. Once calculated, you should have a solid idea what the appropriate investment will be for the desired reward.
New customers are great, but they aren’t mutually exclusive to growth. Fact is, the more we focus our growth efforts on our current customer base the more profitable the business becomes. LVC can become somewhat cyclical. The more you know about how much your new customer acquisition costs:
- The longer over all life cycle your organization can achieve.
- The more you can focus on building sales within your current customer base.
- The lower you out of pocket cost on new business.