How measurable is the success of your small business? There are a few metrics that will likely determine the health of your company, and depending on the line of business you are in, these key performance indicators (KPIs) vary.
One KPI that is universal in businesses that sell products is customer lifetime value. Whether you serve billions of customers, or a handful of clients, calculating the lifetime value of these customers can provide a framework for growth. How then, does one calculate customer lifetime value?
[amazon_link asins=’B00X6UXHUQ’ template=’ProductAd’ store=’succeedingi0d-20′ marketplace=’US’ link_id=’88cad4d1-c7cc-11e8-a8d9-01e9470dc7b2′]The lifetime value of a customer is a projection, or estimate, of how much profit a single customer will contribute over the duration of their working relationship with your company. The calculation takes in the revenue for the average order, how frequent a customer makes a purchase, and for how long the company can retain the average customer. The final component is the profit margin. This will provide the average net profit a company can expect over the business lifecycle of a single customer.
For example, the average sale of the ACME company is $100. The average customer buys from ACME two times a year and typically remains a faithful customer for five years. ACME’s business model economics allow for a slim profit margin of only 10%. The customer lifetime value for ACME would, therefore, be calculated:
Lifetime Revenue = $100 x 2 purchases x 5 years = $1,000
Customer Lifetime Value = $1,000 x 10% = $100
[amazon_link asins=’B006AA0LTE’ template=’ProductAd’ store=’succeedingi0d-20′ marketplace=’US’ link_id=’9833b04b-c7cc-11e8-b212-c9b3d83550f7′]Having this information helps you make a number of decisions because, in effect, customer lifetime value places an upper limit on sales and marketing expenses. In the above example, for instance, if ACME were to spend more than $100 to acquire a single customer, the business model would be a losing proposition.
For more information on customer lifetime value, CleverTap has created an infographic featuring the calculation, an example, and tips to optimize customer lifetime value.
