If you don’t’ know these numbers, you don’t know anything. You’re totally shooting in the dark with your business when you have no idea of what marketing channels are working for you and what the cost of acquiring a new customer is and what that customer is worth to you over their lifetime.
I first learned about the concept of lifetime customer value from marketing legend Jay Abraham in the mid-1990s. And it’s a concept that applies to any type of business.
The basic calculation of Lifetime Customer Value is a simple one. Just divide your revenue over time by the number of customers who generated that revenue. That gives you the average lifetime value of a customer to you.
You can use that figure to determine how much you can afford to spend to acquire a new customer. I think it’s more important to think of this in terms
of the profitability of a customer rather than just the gross sales revenue. If you have hard costs associated with making a sale those should be taken into account before deciding the justifiable new customer acquisition cost you can afford to absorb.
You should also remember to segregate your customer list in different ways as part of your analysis process. Custom- ers who participate in a continuity pro- gram of yours may have greater value than others. Or people that attend live events may be of greater value.
You should also look at your various lead generation sources. You may find that one particular marketing channel generates far more valuable customers to you than another. Or you might find certain socioeconomic groups, or countries, or sex, or ethnic group might generate higher value customers.
Know these numbers. It’s critical to your long-term success.