Why Lifetime Value of a Customer Is One of Your Business’s Most Important Metrics

Home » Blog » Why Lifetime Value of a Customer Is One of Your Business’s Most Important Metrics

Lifetime Value of a Customer

Repeat customers are extremely valuable to the success of your business. How valuable, exactly?

Well, the lifetime value of a customer is arguably the most important figure to know in not only your marketing plan but also your business profitability plan. As a business owner, you should know exactly what the lifetime value of a customer is, update it regularly, and work to increase that figure.

What’s more, there’s really no excuse for not knowing this number, as it’s very easy to calculate.

How Do You Calculate the Lifetime Value of a Customer?

You can easily calculate the lifetime value of a customer by using the following formula.

First, take the average price that a customer pays for one of your main products or services, and multiply that number by the average number of years in which they remain as a customer. Next, add the average value of any referrals that you can expect that customer to generate over that period. Finally, add any upsells and cross-sells that you earn over that period.

To demonstrate this, let’s take a look at a $250 tax return customer, for example.

If that individual stays with me for an average of seven years, they are no longer a $250 customer but rather a $1,750 customer. Now, over this seven-year period, suppose that they refer two new customers. The customer is no longer worth $1,750 but rather $5,250.

Now, let’s add upselling and cross-selling into the equation, and see how it affects the lifetime value of my tax return customer. If I’m able to upsell year-end tax planning for $750 per year, a one-time QuickBooks training for $1,250, and annual QuickBooks support for $600 per year, for example, the lifetime value of my customer is now a whopping $15,950.

Finally, suppose that I’m able to upsell and cross-sell in the same way to the two new customers that my original customer referred to my business. This generates an additional $21,400 that I can attribute to the lifetime value of my original customer.

So, instead of viewing my customer as merely a $250 customer, I need to start viewing them as a $37,350 customer. This should not only change the way that I treat the customer but also change the way that I value customer retention.

Why Is Customer Retention So Important?

Without a doubt, the easiest customer to sell to is an existing customer. Why is that? It’s because the existing customer already knows you, likes you, and trusts you — the three most important factors in sales.

The reality is that your business will expend a significant amount of time, energy, and money any time you gain a new customer.

With that said, knowing the lifetime value of a customer will transform your approach to marketing to new customers. If you view a new customer as someone who can generate a lifetime value of $37,350 for your business, for example, it makes it much easier to reconcile the time, energy, and money that you might spend upfront to earn their long-term business.

2 Ways to Increase the Lifetime Value of a Customer

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 customer’s lifetime value, today.

1. Create a Customer Referral Program

As we saw in the example earlier, a handful of customer referrals can grow your customer’s lifetime value exponentially.

Given the sheer impact that a referral can have on your business, one of your primary goals should be to increase your number of referrals. You can achieve this by implementing a customer referral program. Essentially, a customer referral program rewards your customers whenever they bring more customers to your business.

2. Develop Your Upsells and Cross-Sells

Upselling and cross-selling allow you to generate more customer revenue from premium, related, and supplementary products and services. The power of upselling and cross-selling is in the fact that it’s typically easier to sell to existing customers than to a first-time buyer.

So, develop new ways to upsell and cross-sell to your customer base, and train your team on how to effectively sell those products and services!