New businesses often think in terms of sales rather than relationships. But your customers will only keep coming back if you value them as more than a simple transaction. You must think long-term, which requires understanding each customer’s lifetime value (LTV). Lifetime value refers to the expected gross revenue your customer will bring in throughout your relationship. Through LTV, you can understand what each of your customers is worth and forecast earnings. Knowing their LTV also allows business owners to make the most of their marketing efforts and grow their profitability. After all, it’s worth spending more to acquire each new customer when their lifetime value is high. LTV will vary widely across industries. For example, even with repeat business, clients at a roofing company will generally have a higher LTV than diners at a restaurant. Your demographic, pricing, and the type of service or product you offer will determine your ideal LTV and your room for growth. How do you calculate the LTV of your business? Different experts suggest a variety of formulas that will give you more or less precise outcomes. But we’ve included the most straightforward and most common calculation below. Start with the average value of each sale at your company. Hopefully, you already have this information on hand! (And if not, it’s time to start tracking it.) WORTH YOUR WHILE Why You Should Understand Customer Lifetime Value
for businesses that use subscriptions, but other owners can generally get a feel for how often their customers use their services. Some entrepreneurs prefer to group their customers by frequency to determine an LTV for low, medium, and high- value customers. Finally, you’ll need the average time you retain a customer. This might be the trickiest metric unless you run a subscription service. But going through old customer transactions and your sales software can help you estimate your customers’ average longevity to determine a baseline LTV. With the above information, multiply all three to determine your LTV. For example, imagine you own a diner. Jack comes in each Friday and spends $15 on his lunch for 10 years. You would calculate Jack’s lifetime value with the formula 15 (dollars) x 52 (visits per year) x 10 (years) for an LTV of $7,800. Meanwhile, if your average diner spent $30 and visited two times per month for five years, your average LTV would be $1,440. Note that LTV calculates revenue — determining profit is a different matter. But LTV will help you decide whether your customer acquisition cost (CAC) is too high (or, perhaps, whether you can afford to spend a little more). Calculating LTV will also help you learn which customers offer the most value and then develop ways to keep them happy. Finally, you can only fix a problem once you realize it exists. Perhaps your LTV isn’t as high as you’d hope — but you never know you need to improve unless you start crunching the numbers.
Next, determine how many transactions your typical customer makes. This information will be easier to locate
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