Not all customers are created equal.
Last week’s discussion of the cost of customer acquisition (CoCA) ties into this week’s topic: the lifetime value of a customer (LTV).
The LTV is the estimated revenue a customer will generate during their relationship with your business. It accounts for their initial purchase as well as how much they’re likely to spend in the future.
It’s an important number to know because it can help you plan your marketing budget and decide how much you should spend on customer acquisition – a new customer isn’t always worth the cost.
For example, would you spend $200 to get a customer that only produces $250 in gross margin? Probably not, at least not if there were better opportunities available.
Depending on what you sell – a product versus a service, a one-time sale versus a subscription – there are a lot of different calculations, but in the end, the important thing to know is the gross profit margin of a customer during the time they work with you. Once you understand what that looks like, on average, you can make smart decisions.
Of course, as we mentioned, not every customer, product, or service is created equal. Take the time to calculate the LTV for your most popular products and services – and then start figuring out how to increase it.
If you want someone to bounce ideas around with, give us a call.