Calculating Customer Lifetime Value for Your Small Business Jonathan Herrick The Number One Small Business Marketing Question Every Owner Should Ask: What Is My CLTV? Customers are the heartbeat of your small business. In order to find more of them, you are most likely spending your marketing dollars on channels such as SEO, PPC and email marketing to drive visitors to your website and online in the plans they will convert. But once they become a customer, most business never look back to see which lead channels are driving their best customers or which customers tend to be the most profitable ones. Why is that? That is because you are missing the answer to the most important question a small business owner should be asking themselves: What is the lifetime value of my customer? What Is Customer Lifetime Value? Customer lifetime value (CLV), also called lifetime value (LTV), is a metric used to determine the profitability from the entire future relationship with a customer. While it is often a term heard around SaaS and software companies that thrive on recurring revenue, small business owners should not be removed from knowing what their customer lifetime value is and how it impacts their lead generation and customer retention initiatives. By assessing CLV on a regular basis, your small business can determine which of your customers are most valuable and align your sales and marketing strategies accordingly. Importance of Lifetime Value Customer LTV maybe the single most important metric for your small business when understanding your customers. CLV gives you the data you need to answer some BIG questions about marketing, sales, product/services, and how to best serve your customers. For example: Marketing: What’s the most you should spend to acquire a new customer? Sales: Which prospects should I be spending my time with and working to close? Product: How to best align my products/services to match my ideal buyer? Customer Service: How much should I be spending to keep and support a customer? CLTV gives you a picture of how much return business you can expect from a customer, which in turn will help you decide how much you’re willing to spend to acquire new customers for your small business. Calculating Your Customer Lifetime Value There are a number of ways to measure Customer LTV and a lot of them are complex. But to keep it basic here, let’s break it down to three core elements: Annual revenue per customer Average number of years that a customer stays with your business Initial cost of customer acquisition (Total sales and marketing costs/number of new customers) So let’s apply this equation to a simple example.Let’s says you own AAA Tax Service and you provide a tax preparation service that charges $500 per customer per for your service. It costs you $250 through Google Adwords to acquire a new customer. On the surface, that would seem like a recipe for disaster, half of your fee is going to sales and marketing costs. However, once you understand that the average customer stays with you for 9 years and delivers a CLTV of $4250-it’s easy to see the ROI on your spend: Revenue from Tax Service Per Customer = $500 AVG Number of years as a customer = 9 Years Initial Cost of Acquisition = $250 per customer Annual revenue per customer x number of years – cost of customer acquisition = customer lifetime value $500 x 9 – $250 = $4250 Once you determine simple customer LTV, you can better assess how much money to spend to bring in new customers and how much to spend on customer retention. There are more in depth ways to calculate your CLTV such as breaking down your customer acquisition costs in more detail and adding your customer retention rates, but the goal is still the same – to identify customers with high LTV’s so you can acquire more of them and spot the ones with low LTV’s so you decide whether to focus on improving that segment of customers or eliminating them all together. How to Maximize Your Customer Lifetime Value Segmentation Not all customers are equally valuable to your business. For example B2B may have a different CLTV than B2C. Or maybe a certain lead source such as Facebook or referrals are more effective. Use the CLTV formula to better understand which customer personas are the most profitable for you. By identifying which segments or lead sources have a higher customer LTV you will be better able to allocate your marketing and sales investment towards acquiring those customers. Personalization Customers want to connect with your brand and your business personally. But as time goes on and your business grows it gets harder and harder to engage with all of your customers in an authentic and meaningful way. By leveraging technology like marketing automation, you can better understand your customers’ online behaviors and automatically send the right message to them at the right time – increasing awareness, conversations and conversions. Upsell and Cross-Sell The longer a customer stays with you and the more they spend, the greater the CLTV. So if you want to boost the lifetime value for your customers, look for ways to promote new services or products to your existing base of customers. An upsell is when you find a way to increase revenues within the same product or service. For example If you sell a premium tax service as an upgrade for $700 to your standard $500 service offering. A cross sell is when you sell a new product to an existing customer that drives revenue. For example if you where to sell a financial planning service to every customer that received a tax credit. Targeting your customers’ unique needs, you can nurture them with content and offers when they are ready to buy, making it easier to drive additional revenue and sales. By answering the simple question of What is the Lifetime Value of my customer?, your small business will be in better position to know which marketing channels are most effective and how much you can afford for customer acquisition and retention strategies. With an understanding of your CLTV, you can better leverage your time and resources to focus on high value customers for your business.