By calculating the true value of a customer, or potential customer, it places a value on the total sales and profits generated by the customer over their lifetime with the business. The actual numbers can be astounding. For example, although the initial sale may only be $100, the value of repeat sales over a 20-year period can end up totalling over $200,000.
When you calculate the potential value of a customer you realise that the first sale to a customer is rarely profitable and profits from a customer are generated over many years from repeat sales. In addition, repeat customers are your best advertisement and marketing company as they actually use your services or products and recommend you to their family, friends, and work colleagues.
To calculate the true value of a customer you need to:
- Calculate the customers average sales value.
- Calculate average number of sales per customer per year.
- Calculate the average customer lifespan (in years).
- Multiply the figures in 1, 2 & 3 above to calculate the total customer revenue over their lifespan.
- Use the customers total revenue over their lifespan as the basis to calculate the customer acquisition cost the business can afford to spend to gain new customers and retain existing customer.