What's a New Customer Really Worth

All business leaders know the importance of retaining customers. A quality product, supported by a
customer-centric service environment and ongoing communications dedicated to sharing ideas is essential. But companies should periodically examine their customers’ buying habits to better understand the
importance of keeping existing customers satisfied.

“Many small-business people have no idea what a good regular customer is worth to their business,” says Dan S. Kennedy, an author, entrepreneur, consultant and coach to clients running businesses from $1 million
to $1 billion in sales. “The cost of retaining a customer and even expanding a customer’s value is much less than getting a new customer.”

By calculating what an average customer is worth to the business – the Lifetime Value (LTV) of a Customer -- business owners are then better equipped to evaluate the way they acquire customers. There are different
ways to calculate LTV, but here is a simple approach. First, determine your
variables:
1. What is your average sale?
2. What is the frequency of your average customer?

When you multiply the average sale by the frequency of your average customer, the result is your value of a new regular customer. Next, determine the average customer lifespan (years) and multiply the value of a
new regular customer by the years a customer will buy from you. This is the LTV of a customer. It represents how much each customer is worth in monetary terms.

Other ways of calculating LTV consider retention, profitability and consider different kinds of customers. Here is a free, downloadable Customer Lifetime Value Calculator from Microsoft. This tool allows the user to perform what-if analyses to see how different variables drive Customer Lifetime Value and profitability, with the ability to then plan strategies for improvement. The LTV of a customer helps marketing officers determine the amount to spend to acquire a customer. The spend must be less than the LTV of a customer, of course, or the company could lose money. And while some customers bring value in other ways, such as referrals that lead to new business, LTV answers the question of whether a company is appropriately
spending to acquire customers. As long as management understands the life cycle and relationship with the customer, they can modify marketing strategies to work toward optimizing the length of time and value a customer brings to the business.

Jonathan Brindley, CA
President, Liquid Capital Advance Corp.
jbrindley@liquidcapitalcorp.com