When you win a new customer, how long do they remain with you? You’ll need to calculate the average customer lifespan (in years) for your business. Then look at the average annual spend per customer. You can work this out by taking your average order value and multiplying it by the average number of orders per customer.
The above method will calculate the average customer lifetime value, but you might want to work out the expected lifetime value of a specific customer, or a target customer. That will depend on their anticipated annual spend and how long you expect them to remain loyal. Bear in mind the role of contracts in this regard.
Whilst we tend to think of customer lifetime value in terms of revenue, you should apply your gross profit margin to the result and deduct any attributable overhead costs to work out the net profit.
When you’re preparing your marketing and sales budget, it’s vital to know customer lifetime value. If it’s costing you £1,000 in marketing and sales to bring in a new customer and customer lifetime value (net profit) is £20,000, you’ve got yourself a deal! Keep pressing ‘repeat’ as quickly as you can!
Customer acquisition cost (CAC) is an important metric. Costs associated with acquiring customers will be marketing and sales costs, associated wages, software, professional services (outsourced) and a portion of your overheads. If you do need to buy equipment to facilitate customer acquisition, include that too.
The simple way of calculating CAC is to take all of the above costs and divide the total by the number of new customers acquired.
It’s a good idea to collate all of these costs together but separate them out. You can calculate overall CAC as described above, but then look at each separate element of the cost and ask yourself how much that contributed to the overall result.
