Determining Your Customers’ Lifetime Value
by Leeia Ladipoh
Published November 29th, 2007
One very important concept when it comes to determining your business model is deciding what the lifetime value of your customers is going to be. The concept of the customer lifetime value has long been a part of the business world, and it will come into play in virtually every segment of your business - from year to year budget projections to promotions and even customer support options.
Simply put, customer lifetime value is how much money a customer will contribute to your business over the lifetime of your relationship with them, and it is always calculated in present dollars.
In this article we will consider some of the categories that a customer’s lifetime value may fall under - obviously, the type of business will determine just how much a customer will contribute over the term of the relationship.
* Migrations vs. retentions. This is the big divider when it comes to customer lifetime value calculations. Retentions refer to customers who operate under contract; their value is relatively easy to calculate, as you know immediately how much they are going to spend on your business each term.
The trick is in projecting how long they will stay within a business, which is where customer relations come into play. Migrations refer to a business, such as retail, where a customer may or may not use the services of the business again.
* Dividing into segments. Of course, not all of your customers will use your products in the same way, or need them at the same time, when you are talking about migration logistics. In this case, it becomes necessary to break your customer base into segments, divided by similar spending habits over similar lengths of time.
* What to include in your calculations. Once you have those segments into place, the hard figures will start to come out. You need to decide just how much profit you will earn on the immediate purchase of a customer, and then project how much you can expect in future purchases as well.
In addition, you should also include the value of any future revenue if you were to have the cash in hand today; this last part is particularly valuable in determining your marketing approach.
Once you have determined the lifetime value of each of your customers, you know where you want to spend the most amount of time, energy, and money as far as marketing and retention.
A retail business, for example, may project strong sales based on a promotion, whereas a service counts on continued returns in order to gain the lifetime customer value. Your focus on these areas will determine the accuracy of your calculations.
