How to calculate your customer lifetime value ?

…. And why is it important to do better than your competitors.

Several Web marketing blogs have already looked into this topic and have provided formulas to help calculate:

1/ the Average Customer Value (monetary)

2/ your website’s Average Value per Visitor: what is the maximum amount you should pay for a click.

We offer a realistic and easily applicable approach!

Although these formulas are relevant in assessing the IMMEDIATE value of a new customer, they do not reflect his average value over a given period. They do not take into account either the field of activity of the company, especially if it is a service company.

Here is our approach: a formula adapted to your business model, each parameter being adjustable according to your own data.

This is not meant to be complex mathematical calculations: our formula is directly applicable and measurable.

The idea is to be able to invest more than your competitors to acquire new customers. This involves determining the Average Customer Value (ACV) over a given period.

Which criteria should be considered?

For example, Combustible has addressed the hypothetical case of a dentist with a private practice. The following figures come from an analysis carried out with several dentists.

Several parameters are required to calculate it by simply answering these questions:

• What is the time period for which you want to calculate the average customer value? (time period is usually measured in years): in our example: 3

• On average, how many times a year a customer buys your products or uses your services? in our example: 2 times per year on average

Note: note that some products/services are not purchased more than once a year, for example, a ski manufacturer who expect their customers buy a pair of skis once every three years, would put 0.3

• On average, what is the % of your customer retention? (Out of 10 customers, how many come back to buy your products/services during the next time period?). In our example: 75%

• What is the average transaction amount per customer? In our example: $ 400

• What is the average profit margin? in our example: 40%

• Therefore, what is the profit per transaction? here: $ 400 x 40% = $ 160

• What is the average cost of reaching a potential customer through search engines? in our example: $ 3

Note: this includes paid advertising, the cost of mailings, buying email lists, etc. Clearly, it is the cost per customer that we would like to reach on the Internet.

• What is the average conversion rate of a visitor? (per 100 visitors, how many become customers for the 1sttime?). in our example: 3%

How do you calculate the ACV (Average Customer Value)?

From all this, the following formulas are obtained:

• The  gross ACV for the specified period= (number of purchases per year x average transaction amount) + (average transaction amount x (customer retention rate x (given period – 1)))

In our example = (2 x $ 400) + ($ 400 x (75% x (3-1))) = $ 1,400

• Customer acquisition cost= average cost to attain a customer/average conversion rate

In our example = $3/3% = $100

• Net ACV for the period = Gross ACV for the given period – acquisition cost

So: 1,400 – 100 = $1,300

How to calculate the AVV (Average Value per Visitor)?

Now that you know your industry’s average customer precisely, you can calculate the amount you invest to increase the number of visits to your website, based on the Average Customer Profitability (ACP) for the given period.

Average Customer Profitability (ACP) for the period = (number of purchases per year x average profit per transaction) + (Average profit per transaction x (retention rate x (given period – 1)))

In our example: ACP = (2 x 400) + (160 x (75% x (3-1))) = $560

From there, you can determine that the Average Value per Visitor is

In the same example: $560 x 3% =$ 16.80 is the Average Value per Visitor

This means that you can invest up to $16.80 per click without losing any money!

What are the recommendations?

Clearly, if you, with accurate projections, invest wisely in a web marketing campaign, whatever your field, you will come out a winner. The more your ACV is, the more you will be inclined to invest to reach a potential customer!

What’s the most interesting part of all? These parameters are not fixed, you can improve them! In our next article, we will answer two questions:

– How to increase conversion rates?

– How to increase customer retention rates?

Your turn to try! Have you ever collected your data to calculate your ACV/AVV?

Download our free calculator (Excel) to make your job easier!