A Customer’s Value Doesn’t Stop at the Checkout Screen

Working outdoors. Beautiful young woman in funky hat working on laptop and smiling while sitting outdoorsOnce or twice over the years, I’ve mentioned the term Customer Lifetime Value.

I thought I’d dwell on it for a moment because some might not be clear what it means in marketing terms and why it’s important.

What it means, perhaps obviously, is the total economic value of a customer to an organization for as long as that person is a customer. It’s not just the transaction at hand, but all future transactions, if any, and all other ways that person may create economic value to your organization, not just on that first trip through your checkout screen.

Let’s say, for example, that somebody buys two tickets to an event and the tickets are worth $100. Exactly one year later, they buy two more tickets worth $100 and do this every year for a total of five years, before they win the lottery and move to Antarctica to start a Penguin Ranch.

They’ve spent $500 with your organization and probably won’t spend anything more, so you can safely call their Lifetime Value $500.*

It’s important because when you do your marketing, you should have a sense of what to spend. Would you spend $150 in marketing to get a customer to spend $100? Probably not. You can count. On the other hand, you’d probably spend $150 to get a customer who’d spend $500, right? Good investment. If you don’t know what your customer’s lifetime value is or is likely to be or typically is for a certain kind of customer, how would you decide?

There are two ways to figure out LTV (Lifetime Value):

Just look at reality. If you’ve got some history with customers, just look back at that history. How much does the average customer spend over year one? How about through year two? Keep going with this and eventually the number will stop getting much higher. That’s your approximate LTV based on reality.

Make projections. If you don’t have much history to work with, you can still get an estimate that’s helpful. It’s particularly easy with something like subscriptions. If your average subscriber pays you $500 a year and the renewal rate is 80%, the lifetime value of the average subscriber (if they don’t buy anything else) is $2,500. How could I possibly know that? Because an 80% renewal rate means that the average person lasts five years — you lose 20% of people per year, thus on average five years.** You can do the same thing with nonsubscribers by taking drop-off rates in individual purchases. If, on average, 50% of customers from 2014 buy in 2015, it’s reasonable to assume that the lifetime of those customers is two years. Since you can see, within just a year, what the average single-ticket buyer spends, you can estimate this with just a year or two of data. You can possibly use shorter time frames as well.

It can be a little tricky and you should reality check the number you get, but it’s an important thing to do if you want to understand how the economics of your marketing works. Knowing this will also help you explain and justify longer term marketing programs and higher quality marketing programs, because they’ll show up in higher lifetime values.

Thinking about today’s transaction is important, but you could be missing a lifetime of value if that’s all you think about.

 

*Technically, this isn’t true because money has “time value.” The $100 in year five is worth less than the $100 today, so you’d count it as being a bit lower. For these purposes, though, I’d ignore it. If you want to know more about Time Value of Money, check this out.

**Of course, some people go on and on and on beyond the end of the average “lifetime.” At Goldstar, we have customers now into their 14th year buying from us, and we hope they never stop. LTV is always an estimate and an average and meant to be illuminating rather than mathematically perfect.

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