Customer lifetime value is how much you make (on average) from each customer. Once you know how much a customer is worth to you, you can figure out how much you’re willing to pay to acquire a customer.
Acquiring customers is one of the most critical parts of running a business. Without them, you don’t have a business.
Since customers are the lifeblood of a business and acquiring them takes effort, it’s important to create ways to retain them for as long as possible.
That’s where these two universal metrics come in: customer lifetime value and customer acquisition costs.
Customer acquisition cost is how much it costs you to get a customer. It’s basically how much you’re paying for that first purchase.
Meanwhile, the customer lifetime value is on the backend. It’s how much you make (on average) from each customer. This number is critically important because once you know how much a customer is worth to you, you can do some analysis and figure out how much you’re willing to pay to acquire a customer.
Let’s dig deeper into what a customer lifetime value is.
Understanding Customer Lifetime Value
Customer lifetime value is determined when you look at everybody who has purchased something from you from $1 up to your highest price and determine the average value total, not of individual purchases, but of that customer.
So, if someone buys multiple products from you over time, you add all those up and that’s their value.
If they’re a member of your membership and they stay, you calculate the total amount of revenue you’ve gotten from them in the membership.
It’s important to track this metric because ultimately, depending on what your margins are, you want to find ways to increase the customer lifetime value.
As customer lifetime value goes up, it means that for each customer you acquire, you’re making more profit, assuming that your products are profitable. If this number has increased, it means you either raised the price on individual products or people bought more.
How to Track Customer Lifetime Value
How do you track the customer lifetime value? Honestly, this can be a bit tricky depending on whether you use multiple tech and financial platforms. If you’re using Stripe, it has “spend per customer” as a number that you can track. So, you can see the average value of a customer over time.
You can look at customer lifetime value for various time periods, like monthly, annually, etc. For example, I can look in my Stripe account, which is where 95% of my transactions happen, and see that I was making $195 per customer in 2018. The next year, it moved up to $397, and it’s been above $400 since.
What that tells me is that on average, each customer is worth that amount for me. And this is probably undercounting because it’s not combining years.
It’s also important to recognize that over time, these numbers will vary. The longer we’re in business, this should go up, partly because you’ll find ways to increase the value of individual purchases.
You may find that when they buy this one product, they probably also need this other product. And if you offer it to them, maybe they’ll buy it. If you deliver a good customer experience after their first purchase, it’s more likely that they’ll buy from you again.
That has been the journey with me. Many people buy legal templates from me, and then later buy business stuff offer from me.
Most of my coaching people are people who had bought something from me on the legal stuff side and ultimately ended up buying coaching from me. That’s a way you can increase value over time.
That’s why you want to focus on this metric in your business.
Key Questions You Need to Ask
When you’re thinking about your business as a whole, you need to be thinking about two things. How do I decrease the cost to acquire a customer, and how do I increase customer lifetime value?
If right now it costs you $50 to get that person to make the first purchase, how do you drive that down?
That’s important because just think about it, if you could drive the cost to acquire a customer from $50 down to $25, for the same amount of money, you could have twice as many customers.
As you drive down the cost of acquiring a new customer, you also want to find ways to increase the lifetime value of your customers. This will make your business more profitable.
These two metrics need to be a big part of your marketing strategy, your business strategy, and everything you do.
When you’re thinking about these metrics, don’t think about individual purchases. You want to know the value of a customer generally, but as you get more refined, you’ll want to ask, “What is the value of people coming into specific lead magnets or particular products?”
You can even see that, for example, if this is their first purchase, they’re worth that much. When you see those differences, it doesn’t mean that you market to one but not the other, but you start to see where you’ll be willing to pay more to get people to sign up for this freebie versus another freebie. On average, you know that people who sign up for this freebie over here are worth a lot more.
Dig Into The Numbers
You need to make sure that you know your customer lifetime value and the cost to acquire a customer. If you know only two metrics in your business, it should be those two.
Now you should know more metrics than those two, so be sure to join BADA$$ Online Marketing University (BOMU). It’s my FREE training program where you get access to courses that will help you build your online business.