Calculating the Lifetime Value Of Customers

The Lifetime Value of a Customer is:

  • Contribution on the first sale
  • Plus contribution on the subsequent sales
  • Less customer related servicing costs…for example I have known companies have to pay a marketing contribution to attract potential customers into retail stores.
  • Optionally the profit stream from customers referred by this customer. It is right in theory but you can find yourself double counting profit.

The lifetime value concept doesn’t fit with financial years.

Customers buy what makes sense to them and when it makes sense to them. They can be encouraged to buy more and more quickly but if you try to manipulate them, you will spoil the relationship.

Marginal Net Worth

The marginal net worth is a very similar concept used by Jay Abraham which involves deducting average customer acquisition costs.

If customer lifetime value is $360

and it cost $90 to attract and convert one customer,

the marginal net worth of a customer is $270.

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