With any business, the aim is to get as much custom as possible, in order to make a good profit and also add something to your customer’s lives. While getting new customers is always great, it’s those repeat customers that are the true dream of many business owners. Just think, a customer who returns to you time and time again is sure to before valuable to your business than a one-time purchaser. But how can you know the lifetime value and profitability of a customer? And why is this information important to your business? In this article, we’ll be looking at calculating the lifetime value of a customer! By working out customer profitability and lifetime value, you will have a better picture of exactly what your customers are bringing to your business, which should arm you with all the information and tools you need to improve this!
So what is the lifetime value of a customer?
Simply put, the lifetime value (or LTV) of a customer is the predicted revenue that a single customer will generate for your business over their lifetime. Now, most businesses have more than one type of customer. So, the LTV for each customer may well be different. For example, a customer who purchases from you each week will have a much higher LTV for your business than someone who purchases from you once and doesn’t return.
Calculating the lifetime value of a customer
When looking at customer profitability and lifetime value, it’s natural to want to look at the stats and facts, the mathematical equations that go into calculating this. And of course, you want to know these numbers as they’re a good indication of the monetary value your customer generates. However, we’ll also be taking more of a 360 approach and looking at some of the other ways that a customer can generate revenue for your business and add to the LTV they produce.
There are several ways to go about calculating the lifetime value of a customer. But, if you’re running a small business, you probably want to know the simplest and easiest way to do it. After all, running a business takes up a lot of time. You have to do so many roles at once, from marketing to accounting and everything in between, before you even get to actually running the day-to-day operations of your business! So, unless you really are a maths whizz, trying to work out the LTV of a customer can become frustrating and confusing quickly. But, there is a relatively simple formula you can use for a lot of businesses. And this is:
The annual profit contribution per customer
The average number of years that they remain a customer
The initial cost of customer acquisition
So, as long as you know roughly what these figures are, you can calculate a rough LTV for each customer! Here’s a quick example:
If the annual profit contribution per customer was £50, and customers, on average, remained with you for 10 years, but it initially cost you £100 to acquire that customer, their LTV would be £400, because 100 x 50 -100 = 400!
This equation can be used to calculate the LTV for all of your customers as an average, or it can be used to calculate an individual customer’s LTV if you have the data you need for them. While this is a very simple formula that assumes the profit a customer brings in remains roughly the same each year, it is still useful to get a good overview of customer profitability and lifetime value. That’s why we recommend it, especially to small business owners who are trying to calculate LTV themselves. After all, there is more than simple financials and profit that goes into a customer’s true LTV, which we will talk about in the next section.
If you do want to know about the financial stuff that goes into calculating lifetime value, there are loads of articles out there that go into more detail. We like this one from UberSuggest. But we warned- there’s plenty of maths involved, so if that’s not your strong point (don’t worry, it’s not ours either!) you may want to stick to a simple-to-use tool, or leave it to the experts!
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Customer profitability and lifetime value: what else?
As we mentioned before, there is more that goes into calculating the LTV of a customer than the simple financials! Here, we’ll go into some of the other areas that you might want to consider:
We’re really big fans of online reviews. In fact, we strongly encourage every customer and Social Clinic attendee to leave us one. After all, it takes just a couple of minutes of their time. but it can have really great effects for our business. For example, if you take a look at our Google Reviews, you can see that we have well over 100 5 star reviews from genuinely happy customers!
You can encourage your customers to leave reviews on any platform of your choosing, whether this is Google, Trustpilot, Facebook, or somewhere else. But what is the point of reviews and how do they add to a customer’s LTV? Well, let’s think of it this way. If you are looking at two separate businesses that offer a very similar service, which one are you going to go for? The one with no reviews, or the one with a lot of genuine customer reviews? It would definitely be the second!
So, reviews can be so valuable in helping you to gain more customers. Something that is free for a customer to do, and only takes a short amount of time, can actually add to their LTV by helping your customer acquisition! And more customers equals more profit and hopefully a higher LTV per customer. Also, because reviews are FREE for your business, the cost of acquiring any customer that approaches your business because of them shoots down, helping future customer’s LTVs become higher, too!
What are you doing to encourage customer reviews? There are a few ways that you can go about it. For example, we send out an email after a customer has attended a Social Clinic, asking them to review their experience on their chosen platform. But, if you are struggling to gain reviews, why not add an incentive for customers to do so? You could offer them 10% off their next purchase for this simple and easy task. Plus, this encourages repeat custom too, which is always good for LTV!
Social media interaction
Now, we know that we talk A LOT about the importance of social media and what it can do for your business. But it really, truly is so important to have a good social media presence! It can help you win more customers by making your business easier to find online. It also gives you a platform to show off what your business does to potential customers! But what does it have to do with the LTV of a customer? Well, businesses that have a great social media presence, including a higher number of followers and better engagement on their posts, are more likely to win more customers!
So, if your customers are interacting with you on social media, whether it’s a simple follow, occasional like, or sharing your page on Facebook, they are helping you to build your profiles. And the better and bigger your profiles are, the more new customers are likely to discover you and everything you do! The more that each customer engages with you, the more their LTV will go up. Their friends and followers will see what they’re doing and become more aware of your business in the process, hopefully becoming customers with their own LTVs. And again, this is a free or cheap way of acquiring new customers, helping their LTV going forward too.
As with reviews, there are several ways to encourage your customers to engage with you on social media. You could offer them a discount for liking your Facebook page, for example. And, you can make that an even bigger discount if they share that page to their friends and followers too! Also, make sure to include your social media handles on all of your marketing materials, such as your website, business cards, and any notes you may leave in packaging, to maximise your chance of getting extra likes and follows.
Finally, we’ll be looking at how word of mouth recommendations can help you with customer profitability and lifetime value! How many of your customers have come to you because you’ve been recommended to them by someone they know? It’s probably quite a few, we know that’s the case for our business. If a customer really loves your business, they are sure to shout about it to their friends and family who are looking for something similar.
Them doing so should help to increase your customer base in another free or cheap way, helping to increase LTVs across the board. So, if you’re looking at customer profitability, don’t forget to include this important consideration.
While it can be hard to calculate the monetary value that customers bring in from things such as reviews, social media, and recommendations, they all work together to increase a customer’s LTV. So, if you’re trying to calculate customer profitability, don’t forget these elements! Perhaps you can keep track of who is coming to your business from recommendations A customer’s value is;t just in monetary terms, as this article has hopefully shown. So, even if a customer’s LTV seems fairly low, think about what else they do, or could be encouraged to do, for your business. From a simple review to telling all of their friends, there is a lot that customers have the potential to do to increase LTV across the board!
There are several reasons why knowing the LTV of a customer is important. Firstly, you want to know if customers are actually profitable to your business! For example, it’s great if a customer brings in £200 for your business, but if you had to spend more than that to acquire them, they will only have a positive LTV for you if they remain a customer spending that much for a number of years! So, you can use this information to see where you can encourage customers to spend more or remain customers for longer, and thus increase their LTV. Or, you can see where you’re spending too much on customer acquisition, and work to cut this down.
Furthermore, if you’re looking at individual customers, you can see who is the most profitable for your business. You can do a few things with this information. For example, you could reward them for being such a loyal customer with freebies or a discount. And, you can investigate exactly what makes them such a great customer, and try to replicate this with more customers.
Overall, having a clearer idea of what your customers are bringing to your business, both in terms of monetary value and the bigger picture, is really useful for any business. Once you have this information, you can see where you’re going right and wrong, and will have the tools and information you need to make some improvements!