The lifetime value of a customer is a vitally important metric that every business owner should know and understand.
Fortunately, this number is relatively easy to calculate.
First, take the average price that your customer pays for your products or services and multiply that figure times the number of years you expect them to be a customer. Then, add the value of the average number of referrals they will send your way during that time.
Now, if you hit “enter” on your calculator and see an enormous number, no, you didn’t make a mistake. The reality is that many business owners sorely underestimate how much a new customer is really worth to their business.
With this new perspective, you may be willing to reconsider how much time, energy, and money you spend on customer acquisition!
Case Study: The Lifetime Value of a Tax Return Customer
To give you a more concrete idea of how valuable a customer truly is, we are going to use my own CPA firm as an example.
Suppose for a moment that we charge $250 on average for a simple tax return. If you were in my shoes, how much time, energy, and money would you be willing to spend on acquiring that customer? An hour, perhaps? Maybe a couple of emails or ads? You certainly wouldn’t want to be spending hundreds of dollars just to get that person through your doors.
But now, let’s look at the lifetime value of that same customer and see if anything changes.
Imagine that this $250 customer stays with the business for seven years and refers two more clients during that time—both of whom stay with your business for seven years. Now, the value of that original customer is $5,250.
How much time, energy, and money would you be willing to spend to acquire a customer worth $5,250 compared to a customer worth only $250? Chances are, much more!
Upselling and Cross-Selling
Now, let’s take this example one step further. What if you were to introduce upselling and cross-selling into the equation?
Upselling is the process of adding in similar or related products and services into a purchase, while cross-selling is the process of adding in a product or service that isn’t related to the original item.
There are a variety of products and services I regularly upsell to my clients. I typically wouldn’t upsell all of them to a $250 tax return client, but for the sake of this example, let’s account for them. These services include end-of-year tax planning for $750 per year, a one-time QuickBooks training fee of $1,250, annual QuickBooks support for $600 per year.
Naturally, I upsell all of these same services to the two client referrals as well. Suddenly, what was once a $250 tax return client is now worth $37,350!
How much time, energy, and money would you be willing to spend on acquiring this customer—a customer with a lifetime value of $37,350?
This is why the lifetime value of a customer is one of the most important figures for any business owner to know. Once you truly understand a customer’s potential value, you will take your marketing and advertising seriously, spend more time, energy, and money to win them over, and fight tooth and nail to retain them!
Take These 3 Important Steps Today:
1. Calculate the Lifetime Value of a Customer for Your Business
Every business is different. Apply the lifetime value formula above to your own products and services and calculate the lifetime value of a customer for your business. Then, compare that number to the amount you’re currently spending to acquire a customer. Adjust your marketing strategy and budget accordingly!
2. Master the Art of Upselling and Cross-Selling
As you’ve seen, upselling and cross-selling can increase the lifetime value of a customer by leaps and bounds. Work upselling and cross-selling into all of your sales procedures so that all of your sales employees are doing their part to maximize the potential value of a new customer.
3. Work to Improve Customer Retention
Finally, improving customer retention can cause the lifetime value of your customer to skyrocket. If the average customer stays for five years, start thinking about how you can get them to stay for 10, 15 or 20 years!