Repeat customers are the foundation of a successful business. But just how important are they? The lifetime value (LTV) of a customer is one of the most critical metrics you need to track. It not only helps shape your marketing plan but also plays a key role in boosting your overall profitability. If you’re serious about growing your business, you need to know this number, update it regularly, and continually work on increasing it.
Fortunately, calculating the lifetime value of a customer is straightforward. Knowing this figure can help you make smarter decisions on where to focus your efforts for the best return on investment.
How to Calculate Customer Lifetime Value?
To calculate the lifetime value of a customer, start by determining the average price of your product or service. Multiply that by the average number of years, a customer stays with you. Then, factor in any referrals they might bring, along with upsells and cross-sells over the same period.
For example, let’s say a customer spends $250 on a tax return service and stays with you for seven years. That customer isn’t just worth $250; they’re worth $1,750. Add to that any referrals (say, two new customers), and the value grows to $5,250. If you also upsell additional services—like tax planning or bookkeeping support—the value increases dramatically, reaching upwards of $15,950. If you replicate that process with the referred customers, the original customer could end up being worth over $37,000.
This approach shifts how you see customer retention and the importance of nurturing long-term relationships.
Why Customer Retention Matters
It’s much easier to sell to an existing customer than a new one. Why? Existing customers already know and trust you, and they’re more likely to purchase again. New customer acquisition requires a lot of time, energy, and investment, which makes focusing on customer retention a more efficient and cost-effective strategy.
Knowing the LTV of a customer allows you to justify the upfront cost of acquiring new customers because you see the bigger picture: the long-term revenue potential.
How to Increase Customer Lifetime Value
Now that you understand why the lifetime value of a customer is so important for the profitability of your business, how can you increase that figure? Here are two distinct ways in which you can start improving the lifetime value of a customer today.
1. Build a Strong Customer Referral Program
As demonstrated earlier, customer referrals can multiply the lifetime value of a single customer. One of the best ways to encourage referrals is by implementing a referral program that incentivizes your current customers to bring in new business. Rewarding customers for their referrals not only keeps them loyal but also taps into new customer streams at a low acquisition cost.
2. Maximize Upsells and Cross-Sells
Upselling and cross-selling offer additional ways to increase revenue from your existing customer base. Since it’s easier to sell to customers who already trust you, presenting them with relevant premium products or supplementary services can significantly boost their overall lifetime value. The key is to develop meaningful upsell and cross-sell opportunities, then train your team to deliver these offers effectively.
By focusing on these strategies, you can enhance your customer relationships, increase sales, and drive long-term growth for your business. Understanding and leveraging the lifetime value of a customer will give you the insight needed to create a more sustainable and profitable business model.