The Lifetime Value of a New Customer

Judy Crawford

Judy Crawford About The Author

Jun 23, 2020 12:48:00 PM

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A customer's lifetime value reflects the full value of a customer to your business over their relationship with you; not just an initial purchase, but the value of that customer as they make multiple purchases with your business.

In order to understand the full value of a new customer, you have to look at the big picture. For example, how much value that customer has the potential to offer your business over a lifetime. 

Depending on your industry, some customers will make larger purchases as they come to trust your business. As they learn that you will stand behind your products and services, they will often increase their overall confidence in you.

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What is a new customer worth?

A new customer might come to your business for one purchase. By treating them right, they will continue to come to you for their needs in your industry. A new customer has the potential to become a genuinely important part of your business. In order to expand customer lifetime value, you must provide high-quality goods, services, and customer service.

In order to calculate customer lifetime value, start by determining three key factors:

Average purchase value

Average purchase frequency rate, or how frequently most customers make purchases

Average customer lifespan, or how long customers typically remain with your business.

Average purchase value, times frequency, gives you customer value. Customer value times average customer lifespan will give you a solid idea of the lifetime value of a new customer. 

Suppose, for example, that a customer comes to your salon for a desperately-needed one-time haircut. They have a place they usually go, but it’s not an option. Perhaps the customer could not get an appointment. Maybe the customer received a truly bad haircut or genuinely bad customer service. Now, they have arrived at your salon.

You give a quality cut. You form a bond with the customer and offer great service. Now, when the customer needs another haircut, that customer would rather come to you than go back to your competitor. You may cut that customer's hair every six to eight weeks for the next several years. The customer may also recommend your salon to friends and family members, further growing your business.

The importance of the initial interaction

When allocating marketing dollars, all too many businesses look only at the first visit. They think, "That's all I made off of that customer." This, however, does not take into account the full worth of a new customer.

If you treat a customer right, that customer often has a worth far greater than just the initial sale. You want to set customers up for future interactions with your business. They might have visited assuming that they would make only a single purchase, but you know your business can continue to benefit that customer. Set your customer up with a plan: offering information about other services you offer that could benefit them.

Car dealerships, for example, may constantly reach out to customers and ask for more business. If they purchased a vehicle from you, then they need to maintain that vehicle with regular oil changes, mile-based maintenance, and even cleaning services. That customer may also need to purchase another new vehicle for another member of the family. The average customer will keep a car for around six years. They then need to make a new purchase, which you want them to make from you. By keeping in touch with your past customers and providing excellent customer service, you create a higher chance of them returning to your dealership when another need arises.

Tailoring your marketing

In addition to managing that initial interaction, consider tailoring your marketing to help you reach customers who have used your business in the past. Retargeting, which you can use for both social media and digital ads, will allow you to connect with customers who have interacted with your business in the past: the ones who have visited your website, interacted with you on social media, or mentioned a purchase from your business.

You can also use targeted emails to help inform customers about other goods and services your business can offer related to their initial purchase. For example, a customer who has recently purchased a pair of running shoes might benefit from other athletic accessories. Targeted emails can give them more information about exactly what athletic wear your store has to offer. By tailoring your marketing, you can reach out to those customers and bring them back to your business for future purchases.

When considering both your marketing budget and how you want to target your marketing, you must consider the lifetime worth of a customer, not just the value of the customer's initial purchase. A customer's value does not rise or fall based on a single purchase. Instead, it reflects the purchases the customer will make from your business over a lifetime interaction.

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Topics: Marketing ROI