How to Measure Customer Lifetime Value
Calculate the cost of earning a new customer., Determine the average first purchase amount by each new customer., Discover the number of times most customers make purchases within a set time frame., Establish an average transaction amount for...
Step-by-Step Guide
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Step 1: Calculate the cost of earning a new customer.
Identify your annual marketing expenses.
Include all direct mail costs, website expenses and bills for advertising and other marketing.
The sum of all of these expenses is your marketing expense for the year.
Establish the number of customers you have annually.
This is not the number of transactions you have per year.
Estimate this figure if you do not have accurate data.
Divide the marketing costs by the number of customers you have each year to determine the cost of earning a new customer. -
Step 2: Determine the average first purchase amount by each new customer.
Make a list of first purchase totals.
Look through your records to gather data for this list.
Sum the figures on the first purchase list, and divide by the total number of purchases on the list. , For example, a retail business that sells household necessities may wish to use the timeframe of 1 year.
However, a business that has a more specialized market, such as appliance sales, may benefit by using a longer timeframe.
The timeframe should represent a reasonable length of time that a typical customer could be expected to make more than 1 purchase. , The average transaction amount puts your customer's buying potential into perspective. , Add together all purchases of a particular customer during the lifetime of your relationship with her. , If your profit margin is 25 percent and a customer's lifetime purchases add up to $500, the profit you received from his purchases is $125. ,, Not all record-keeping systems supply detailed data.
However, consider implementing a record-keeping system that is capable of keeping track of more data if you wish to determine customer lifetime value and other marketing calculations in the future for your business. -
Step 3: Discover the number of times most customers make purchases within a set time frame.
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Step 4: Establish an average transaction amount for follow-up transactions by using a list of customer transactions.
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Step 5: Discover the total amount a customer has spent with your business.
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Step 6: Determine the profit on a customer's lifetime purchases based on your typical profit margin.
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Step 7: Subtract the customer acquisition cost from the profit of a customer's lifetime purchases to determine the customer lifetime value.
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Step 8: Use your best estimates for the requested data if documented information is unavailable.
Detailed Guide
Identify your annual marketing expenses.
Include all direct mail costs, website expenses and bills for advertising and other marketing.
The sum of all of these expenses is your marketing expense for the year.
Establish the number of customers you have annually.
This is not the number of transactions you have per year.
Estimate this figure if you do not have accurate data.
Divide the marketing costs by the number of customers you have each year to determine the cost of earning a new customer.
Make a list of first purchase totals.
Look through your records to gather data for this list.
Sum the figures on the first purchase list, and divide by the total number of purchases on the list. , For example, a retail business that sells household necessities may wish to use the timeframe of 1 year.
However, a business that has a more specialized market, such as appliance sales, may benefit by using a longer timeframe.
The timeframe should represent a reasonable length of time that a typical customer could be expected to make more than 1 purchase. , The average transaction amount puts your customer's buying potential into perspective. , Add together all purchases of a particular customer during the lifetime of your relationship with her. , If your profit margin is 25 percent and a customer's lifetime purchases add up to $500, the profit you received from his purchases is $125. ,, Not all record-keeping systems supply detailed data.
However, consider implementing a record-keeping system that is capable of keeping track of more data if you wish to determine customer lifetime value and other marketing calculations in the future for your business.
About the Author
Alice Ramos
Committed to making DIY projects accessible and understandable for everyone.
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