When we ask business owners what is the their lifetime value of their average customer, here’s what we usually hear:
Business Owner (BO): Oh, I think we have that number somewhere.
Digital Caffeine (DC): Do you know what ballpark it’s in? $50? $500? $5,000?
BO: I don’t know. Some customers are worth $50 and some more than $5000 so there’s no way to tell.
DC: Well, it’s fairly easy to get a rough estimate. If you add all your sales for the year and divide by the number of customers…
BO (cutting us off): Math? Ugh, I hate math. Oh, is that my phone? I gotta take this call.
The Good News
The good news is we’re going to show you a few simple ways to figure this out (using only third grade math) and then a couple of other add-ons to make the estimate more accurate if you want. At least, you’ll now have an idea.
Why You Need to Know Your Customer Lifetime Value
- To figure out your marketing goals and budget. How much is it worth to spend acquiring a new customer? You may think $100 is outlandish until you realize that your CLV is $10,000.
- To target distinct kinds of customers. You may have two or more completely different types of customers. For example, renters who call a plumber about the occasional clogged toilet, and homeowners who get new water heaters installed, their bathrooms plumbed, and subscribe to quarterly home maintenance programs. Figuring out their respective CLVs will give you more insight on what to focus on for marketing, customer retention, and your business in general.
- It’s hard to improve without measuring. How can you improve on your CLV if you don’t know what it is in the first place? And factors like how long your customers stay with you and if they tell their friends about you (via in person or by giving you 5 star reviews) can have a huge effect on your CLV.
- If you’re not the owner/marketing director, figuring this out will make you look good. This is something the boss wants/needs to know. Help them out.
How to calculate your CLV– starting with the drop dead easiest ways
Remember, these formulas are not exact. They are simply to get you into the ballpark of what your average customer is worth. To get uber precise numbers, you will have to sit down with your Quickbooks, your customer logs, your bookkeeper and your accountant. And let’s be serious, you’re not doing that today. So use these spitball formulas to get an informed idea.
(total yearly revenue /number of customers you have) x (average customer lifespan in years)
So– if your yearly revenue is $1,000,000, you currently have 500 customers, and the average average lifespan of your customers is 9 years. Then that would be ($1,000,000/500) x 9 = $18,000.
Not so painful, right? And you can see how the customer lifespan can really affect the number.
What the above number really should be called is Customer Lifetime Revenue because the above doesn’t take in expenses. To take that next step, we’ll add a little bit to our current formula:
[(total yearly revenue – total yearly expenses)/ (number of customers) ] x (average customer lifespan in years.)
So if you had same metrics as above plus $500,000 in expenses your CLV including expenses would be $9,000.
Easier than you thought, huh?
Extra credit: How to include referrals
A chunk of your business comes from referrals. You may have some super evangelistic customers that tell all their family and friends about you. You may have some enthusiastic millenials that give you 5 stars and glowing reviews on Google, Facebook, and Yelp. Ideally, you’re keeping quasi-track of this. As in asking new customers how they found you. While this is a terrible way to track for marketing ( “on the internet” can mean 57 different things), saying “My next door neighbor, Chuck, told me you did a great job on his roof.” is more accurate. If you keep track of referrals, great. If not, guestimate an average here.
Let’s say the average customer over their lifetime refers 3 customers to you then you would take the above CLV and multiple it by one plus three (1 representing the original customer).
[(total yearly revenue – total yearly expenses)/ (number of customers) ] x (average customer lifespan in years.) x (1+ # of customer referrals)
So the above case CLV of a customer including referrals would be $9,000 x (1+3) = $36,000
What to do to increase your Customer Lifetime Value?
The lifetime value of your average customer is probably more than you thought. Which is great. What’s even better? You can improve on it. Here’s how:
- Keep your customers longer. If you have a monthly maintenance service, look into when customers usually cancel. At month 5? 11? 23? Preemptively offer something free or a discount (50% off the 12th month)
- Get your ratings higher. Have your service folks ask, “Would you rate this as 5 stars? If not, what would could I do to make it so?” Look into automated services that nudge customers to give ratings. Like Birdeye.
- Ask if they want fries with that. Make sure your customers know about all the services you offer. And proactively point it out if you’re in their house. e.g you’re unclogging a toilet and you notice that their faucets drip non-stop.
- Thank customers for referring other customers. A handwritten thank you note and a gift certificate or a discount reinforce giving referrals.
Looking for more tips? Contact Digital Caffeine about how to get more customers with paid search and Facebook ads.