Customer Lifetime Value – Why It’s So Important For Good Marketing And How To Calculate It

Oh, customer lifetime value. The metric all businesses should know, but when the question is asked, you get a response similar to an answer on Family Feud, stumbling, guessing, and probably not even close to the real answer.

But why is this metric so hard for companies to come up with? We all know the sale price of our products. Are we not tracking repeat customers? Not tracking averages order sizes? maybe there’s nothing being tracked!

And that’s the root to a major marketing problem. How can we run good advertising if we have no idea how much a customer is worth to you?

This usually results in an outcome of a business blaming a marketing company that they are getting no ROI when in fact, it’s that business just deflecting the fact they actually have no idea what the ROI is they need.

WHY LIFETIME VALUE IS SO IMPORTANT

See, most companies base their marketing efforts off the sale of one product, one time.

What you’re telling me is your product is one of two things, so good nobody ever needs to buy it again, in which case, you better be charging an arm and a leg, or two, your product is so bad you don’t have repeat customers.

My guess is neither is true. So let’s figure out a real customer lifetime value.

We are going to use a restaurant as an example.

Basic numbers:

Average one person order: $20

Average party size: 4

Making your average order: $80

This is all information a restaurant would know in two seconds.

Now, let’s assume you have great food, great service, pretty reasonably priced restaurant.

Humans eat out a lot. A typically family or party of 4, may come back twice a month.

Perfect, so now we are at $160 of revenue each month per party of 4.

But that’s just for the month. People don’t stop eating after a month. After a year, that party of 4 is now worth $1,920 ($160*12).

Doesn’t stop there. The average family lives in a house 4 years. Assuming you continue to be amazing, that ONE family of 4 makes you $7,680 ($1,920*4 years).

Wow, that escalated pretty fast. What I’m trying to say is, in all reality, you should be willing to spend $7,679 on marketing to get one new customer.

Now, I understand that’s not realistic. You can’t come out of pocket that much in hopes to finally turn an ROI in 4 years.

Let’s get realistic and say 3 months to turn an ROI.

That still puts us at $480 in revenue per 1 new customer/family acquisition. Any marketer, even a really bad one, can get you a CPA (cost per acquisition) of a restaurant under $480.

LET’S BREAK THIS DOWN

Month 1:

Marketing spend – $480

New customer – $160

Net loss – $320

Month 2:

Marketing spend – $480

New customer – $160

1st customer – $160

Net loss – $160

Month 3:

Marketing Spend – $480

New customer – $160

1st customer – $160

2nd customer – $160

Net loss – $0

Month 4:

Marketing Spend – $480

New customer – $160

1st customer – $160

2nd customer – $160

3rd customer – $160

Net gain – $160

In 3 months, nearly worst-case scenario CPA, you’re generating a break even, soon to be positive ROI marketing campaign.

THAT’S NOT EVEN COUNTING REFERRALS!

If you have a referral incentive program or you truly are great, you can bet each one of those customers is telling their friend. Now you have a break even campaign the 2nd month!

And the best part about marketing (good marketing), the longer marketing goes on, the better campaigns can be optimized, drastically dropping CPA.

Here’s the problem we see a lot. Business’s don’t know their customer lifetime value or don’t know how to track it on their end, then blame the marketer for not being able to tell them how much money they are making from marketing.

The honest truth, it’s not a marketer’s responsibility to tell you how to determine your lifetime value. It’s our responsibility to track what’s generating a new customer. It’s our responsibility to tell you what’s generating positive responsive, creating and optimizing campaigns and creatives, and getting your message to your ideal audience.

In order to track what channels are generating sales and new customers, you’ll either need a 3rd party reporting tool or set up goals in Google Analytics. Setting up goals is something whoever helps you with marketing should be able to do. It may be something you’ll need to pay for as it can be a quite exhausting task depending on the scope of your business.

SUGGESTION

If you really want to have your marketing channels tracked with known revenue, set up Google Analytics properly (this obviously only applies to online only transactions). It will tell you everything you need to know when set up correctly. This includes setting up all the proper goals and dollar amount (use lifetime value) when that goal is completed.

If this sounds daunting, hire a professional. Many marketing companies can do this or use something like UpWork and hire a Google Analytics expert, probably cost around $500 for a really good setup.

SUMMARY

It takes a lot to run good marketing. If in the back of your mind you know you need more marketing or want to better utilize marketing, figure out your customer lifetime value first. This will allow you to have a much more realistic conversation with your internal marketing team or agency you hire.

 

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