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The Lifetime Value of a customer is one of the most valuable things you as a business owner can know. It is simply a calculation or determination of how much (in dollars) each of your customers is worth to you

The reason this calculation is so critical, is that by knowing what the value of an average customer is, you can then determine how much you can afford to spend to acquire a new customer, as well as how much you can afford to spend to keep an existing customer from leaving you and purchasing from a competitor.

Lifetime Value can be determined a couple of different ways. To get the Gross Lifetime Value you calculate:

  • The average purchase amount…
  • Multiplied by the average number of times a customers buys per year…
  • Multiplied by the average number of the customer continues to buy…
  • Plus, the monetary value of their referrals

This gives you the total worth or Gross Lifetime Value of each customer.

Another way to determine the value of a customer to your business is to compute the Lifetime Profit Value. This differs from the Gross Lifetime Value, in that this computation figures the amount of profit each customer is worth to your business. This is determined in much the same way as above, but with one additional step:

  • The average purchase amount…
  • Multiplied by the average number of times a customer buys per year…
  • Minus product acquisition or production costs, fulfillment and delivery costs, sales commissions, bonuses and salaries, advertising and marketing costs, and other overhead expenses.
  • Multiplied by the average number of years the customer continues to buy…
  • Plus, the monetary value of their referrals. 

This gives you the total profit value of each customer.

There’s value in doing both types of calculations for your customers and clients.