Lifetime Value Of Customers

The concept of the lifetime value of a customer is based around the idea of how much an average customer is worth to your business.

It is the profit you make on selling to the customer from the first transaction to the last.

It can also include the value of the referrals made by the customer to others.

Lifetime value is important because it tells you the maximum you can spend to acquire a new customer.

The simple example would be selling an ebook online.

Because we’ll assume there are no variable costs, if you sell the book for £30, you receive £30 of contribution.

To keep things simple they buy once and there are no upsells or other promotions.

If 5% of visitors buy, that means the average visitor is worth £1.50 to you.

And if you drive traffic to the webpage through pay per click schemes like Google Adwords, then you are happy to pay £1 for the click.

Because on average every 20 clicks you buy for £20, you get one customer who pays you £30.

In effect you can think of this as buying money for less than the face value.

It also means you can acquire customers at break-even or even at a loss on the first transaction and make a profit on what’s known as the back end.

Icy Hot – Acquiring Customers For Back End Profits

Jay Abraham tells a story about Icy Hot, one of his clients with an arthritis type remedy which was being sold through cost per order radio advertising.

That means the radio station didn’t earn a fixed fee but received money for every product sold. In fact the deal was something like the radio station would receive all the proceeds from the first sale – about $3 – plus an extra 45 cents from Icy Hot as a thank you.

The radio station therefore picked up $3.45 and was happy to run the advertisement whenever they had space.

Icy Hot avoided having to pay for risky fixed cost advertising and in fact was getting a cheap deal. That’s because the ointment only cost about 35 cents to make.

Each new customer didn’t cost it $3.45 the radio station was getting but just 80 cents (45 + 35).

And because the ointment relieved pain and swelling, 80% of customers bought every month. That’s a lot of profit coming through on the back end which made the initial risk seem tiny in comparison.

A great story which I hope has given you food for thought.

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