Calculating the Lifetime Value of a Client
How much would your business improve if you could bring in an extra 10 clients this month? What about an extra 100? Wouldn’t you be willing to invest in these customers if you know that they’ll become your clients, even if you don’t make a huge profit on the first transaction?
Shouldn’t you instead nurture these people so that they will come over and over to your place? These are very important questions that have essential consequences in the way that you’ll spend your marketing money. Let’s try to understand what a client is worth to you in profit over their lifetime with your business. Remember, you must first have a great product with excellent service so they will return repeatedly.
We need to calculate the profit that every client can generate for you minus all the expenses in advertising, marketing, and customer service. This exercise is aimed to understand the lifetime value of a client. It is the estimated profit that a recurrent client will bring to your business over a period of five years. (We assume five years per client for a local business since this is the average time that Americans live in one place.)
You will be very surprised to learn how much money your clients are worth to you.
Let’s say that the average new customer that comes through the door brings an average profit of $20 in the first sale, and, after having a great experience, becomes a client by coming back once a month for a total of 12 times a year. This is a realistic goal if you really cultivate your clients and set your standards high.
So, let’s see: $20 x 12 = $240.
If this client frequents your business for five years, before they move out of the area or stop coming, he/she will be worth $1200 in pure profit ($240 x 5 = $1,200). Of course, you'll need to adjust this formula to fit your situation, but this will help you understand the concept.
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