Getting Acquainted with Lifetime Value

When you have an idea of how much business you can expect from a customer you can then turn that information into a predictable budget that can be set to acquire said customer.

This “lifetime value” becomes a benchmark.

There is a simple equation for determining this value:

  • (Avg. sale) x (# of transactions) x (Avg. retention time)

So if you were to put this into context – let’s use Netflix as an example – we could see that a customer could show these values: $7.99 x 12 months x 2 years = $287.64.

Developing this lifetime value of a customer allows for you to make predictable models for the current state (and future) of your business through data analysis.

With that number in mind – you can now do a myriad of changes to the business strategy:

  • Cost Per Acquisition. Having determined the value of a customer you can then accurately set a budget for your cost per acquisition. If you knew you would earn the $287.64 in two years would you be willing to spend $20, $50, or even $100 to acquire them?
  • Customer Service. Once they are in your system you have to consider how much customer support you can realistically provide to stay within profit. Compare the customers and you may find those which are tedious to handle and waste CS rep time that could have gone to the good customers.
  • Marketing Initiatives. Like knowing the CPA you will also know what type of marketing budget you can put in action thanks to this number. It will help you identify which platforms provide the highest ROI, based around your budget and audience.

However, do not forget the operational costs you incur to produce the goods and services to these customers.

If you paid your CSR’s $12 an hour and they are held up on the line with a customer for a couple then the value of that customer begins to rapidly decline. On the flip side, this level of customer support may turn this individual into a lifetime customer which allows for greater profits over the long-term.

It’s also worth noting that as much of a value there is in prediction … it pales in comparison to the data you can collect right now. Predictions are just that … predictions. If you are able to collect data using current data models you will be able to identify the true customers that exist within your base, now, which can help fund and align your efforts for future prospects.

When you’re ready to step up your involvement in data, marketing, and customer support opportunities then turn your attention to adQuadrant. We place a great deal of effort into understanding your customer lifetime value which allows us to strengthen your conversion funnels and increase conversion rates accordingly to achieve your acquisition goals. Feel free to send us inquires at info@adquadrant.com and we will do our best to find the right solution for your budget.

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