Business owners, entrepreneurs, and business executives have a lot to consider while running a business. Naturally, it can be difficult to quantify the value of one customer. This is why customer lifetime value is important. It aids in determining whether a certain promotion or advertisement is successful or valuable. If 27 people show up at your restaurant or buy your product because of a promotion, was that a success? It depends on how much one customer is worth to you.
Take into consideration that happy customers will continue to purchase from you multiple times, some of them for many years. A percentage of those satisfied customers are going refer your business to others. There’s also an adverse cost to one customer that can be negative if they aren’t satisfied. Just like figuring out customer lifetime value, there is a formula to figure out the unhappy customer lifetime cost. Here’s how you can determine your single customer lifetime value.
What Is the Exact Lifetime Value of One Happy Customer?
There is a general formula to calculate the above value. You can see it below.
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
However, every industry has different inflection points for a single customer. So the formula for determining your customer lifetime value will differ, and have plenty of particularities. This is based on:
- Average sale amount;
- The average frequency of your service or sale;
- The number of customers that shop your service or product together in a group.
Assume for this an example: your average ticket or sale from one customer is $15 and they shop alone. If they’re happy customers, they’ll return or buy from your business a few times per month. Over the course of 12 months, one customer will give you around $500. That’s if they’re buying alone and not in a group of 2-3, as customary in the restaurant industry. If they are in a group of two or three, you can simply multiply the average single ticket total by that number.
What More Can You Need from Customers? Referrals
Proceeding with the example, a happy customer in the restaurant industry refers 5 or 10 people on average. Only one or two of those referrals will actually stick and become a returning customer. In the restaurant industry, the average customer’s loyalty is five years. Your industry might be a different number, but it’s likely comparable. If one customer gives you $500 revenue per year, and their single lead referral pays the same, that’s $1,000 per year. One satisfied customer isn’t worth $15, they’re worth more like $5,000 when factored over 5 years. The total value of 10 happy customers at this rate is $50,000.
As you can see, one promotion can potentially equal hundreds of thousands of dollars long term. In order to see these numbers from just a $15 average ticket sale, you must be creating happy and satisfied customers once they come in the door or buy your product. Customer lifetime value is why customer satisfaction should be of paramount importance for your business. Having great service and great products is vitally important to your bottom line. The customer lifetime value of your business isn’t zero if they are unsatisfied. It’s actually much worse than zero.
What’s The Lifetime Cost Of One Unhappy Customer?
Let’s reverse engineer the customer lifetime value equation to figure out an equally important side to customer retention and value. This is the cost of an unhappy customer. The average amount of referrals from one customer can be very lucrative and good for business. But what are they going to say about your business to those 9-10 people if your product, service, or experience is negative?
- Most negative referrals won’t ever become a customer. If an unhappy customer tells 10 people about their bad experience, you can’t expect any of them to shop your product or service.
- Let’s say some of them still do show up. The cost of 3 lost customers is $15,000 to your business, plus the person who was unhappy in the first place. The total cost of one unhappy customer can be over $20,000 to your business!
Do you see now why you should consider customer lifetime cost as well as value? If you have 27 customers that come into your business from one promotion, you should make sure they’re very happy when they leave. The cost of unhappy customers over a lifetime could equal hundreds of thousands of dollars for your business over just a few years. You don’t want to take the lifetime value of one single customer lightly.
How To Leverage Your Customer Lifetime Value
Here’s how you can determine your customer lifetime value:
- Take your average ticket amount from one single person. Multiply it by the average monthly frequency of your customers. Multiply that amount by 12 and you get your customer’s yearly value without including referrals. Then take the yearly value and multiply it by the average number of years a customer pays you for your service or product.
- Assuming each customer refers 10 people as per industry average, and only one of them becomes a returning customer, you can multiply this total by 2. This number is your customer lifetime value.
- Don’t forget to keep in mind the adverse cost of an unsatisfied customer. Just as important to your bottom line as customer lifetime value is the cost of all the negative referrals that keep people from buying from you. This is why customer service is so important. If a single customer has a lifetime value of $5,000, then disappointing them costs you $10,000.
To Your Customers
Unless you understand your business’ specific customer lifetime value, your business will not provide great service or products. Many managers and even general managers do not understand how customer lifetime value works. Mostly, that’s why service is disappointing in most businesses. Business owners should share this article or explain the formula for evaluating customer lifetime value to their managers and staff.
How much is one customer worth to your business? Be sure to leave a comment letting us know what number you came up with!
The images are from depositphotos.com.