Lifetime Value of a Customer

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Growing moneyThe lifetime value of a customer is one of the most important numbers every business owner must know and understand.  You calculate it by taking the average price that your customers pay for your main products or services and multiplying that average by the number of years they will remain a customer. Then add the value of the average number of referrals they will send you during their time as a customer.

Calculating this number often changes how much you would consider spending on each customer and how you and your staff treat them. In my case, the average personal tax return customer is charged $250. If I only look at this amount, how much should I spend on advertising and how much time should I spend with each return?

But let’s calculate the lifetime value of that new tax return customer. Assume that this new customer will stay an average of seven years and refer two other tax return clients during that time. The lifetime value of that customer is $5,250, calculated as follows:


Now that I know that this new customer is worth an average of $5,250, not $250, how much should I spend in time and money to get this client and keep them happy?


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